1 - Failure of the connectivity test is NOT a mod chip issue at all!
The connectivity test SHOULD succeed even if your box is chipped.
If it fails there are kerberos/handshaking problems at work which may be related to misconfiguration or problems at MS's servers.
The failure will occur with new non-modded systems as well, and seems to be somewhat random.
2 - Upon an initial XBLive connect via a game (if connectiviity is good), your Xbox will receive an "update".
This update is capable of detecting the Mod chip and retail CD.
It does NOT matter if your XBox is chipped or not, during the update process.
3 - After the update if you start an XBLive game (and connectivity is good) your mod chip will be detected if on. This will prevent your from connecting to the game servers. The troubleshooting dialog will still NOT report any trouble.
4 - If you turn OFF the mod chip on the same machine (without connectivity issues) the same RETAIL games will play fine.
5 - The problem is NOT related to ANY software on the hard drives nor kernel & Bios VERSIONS.
I've run 4034 bioses on 3894(?) machines and XBLive works fine.
The Dashboard used once the update is complete is the SAME for all Xboxes.
I've unlocked and swapped out hard drives from IDENTICAL working and nonworking Xboxes, then relocked. The problem ALWAYS travels with the motherboard itself.
6 - Machines are NOT detected and BANNED over time. I've had units WITH mod chips on line since the start of the retail period.
Simply turning OFF the mod chip restores game operation on retail games.
7 - Accounts are NOT detected and BANNED over time. I've used the SAME accounts in all cases as a further check.
8 - This is NOT an IP or MAC address issue. I've swapped both on many non-working and working machines, again the problem stays with the motherboard.
It MAY be related to the serialization of the motherboard's EEPROM.
E. G. Certain serial numbers are not being accepted or more correctly replied to by the servers.
9 - This (connectivity) is NOT related to how old the machines were or if they EVER had a mod chip installed.
Old machines both work and not work as observed above.
10 - This is NOT a "banned" serial number problem.
New unchipped machines, old unchipped machines exhibit identical problems.
In all cases the machines never get a response from the server.
A banned machine will receive a not-authenticated reply from the server. This never happens (YET!).
11 - MS is spreading FUD about this entire process.
They are purposely misreporting what is occuring and/or their techs are not up to speed, etc.
The on-line techs also seem not to know what is going on.
12 - This is occuring with great frequency on non-modded Xboxes.
It is unlikely that MS will take back 30% of all Xboxes out there for repairs since they do not work on XBLive.
13 - Bottom line:
If you get connecitivity in the Xblive tab, turn off your mod chip and PLAY!
14 - You will need to be able to disable the mod chip via a switch or other type mechanism to go onto XBLive games.
15 - There are no ill effects to be had by leaving your mod chip ON.