I've been to Comdex this week, and talked to official Xbox personnel face to face about modchips. They just ban serials, and are not interested in banning accounts (probably because legal trouble could ensue if an account is banned for assumption of illegal piracy and no piracy actually took place)
Its all marketing, and it worked... let the modchip'ed play the beta, get them hooked on it, and then force those people to buy a new unmodded xbox in the end. Let friends tell friends that "modchips work fine! no worries!" then get them all in the end, forcing more hardware sales.
Activities like this are not uncommon. Sony Playstation2 is NOTORIOUS for breaking down constantly. Cheap lasers stop working with DVDs or PSone or PS2 games, either blue or silver disc. They call it "planned obsolesence" which forces customers, who already have a library of games, to buy another PS2 when their first one breaks. This increase in sales allows Sony to tell companies like RockStar "we have more systems on the market than anyone, so why dont you just make games for us!" PS2 has sold 11 million units with this scheme.......... and MS saw an opportunity to help themselves catch up.
Secondly, allowing modchip'ed to play during the beta allowed MS to troubleshoot their detection and banning techniques over many months. It will probably be very very difficult to bypass, because they had a testing ground of 1000's of hacked xboxes to try, retry, and verify hardware and software information. When all those gamers were laughing and saying "we tricked MS! ha!" - MS actually had their number. Literally.
ON THE FLIP SIDE, yeah it sucks they tricked us. But we have XBconnect and Gamespy.... and if more people are playing those services, others will join in. A crowd attracts a crowd.
As far as cheating, thats an understandable threat to Xbox Live. So what is MS going to do when GAMESHARK XB is released? Infinite energy/missles? and its 100% Legal
Concluding, I'm pleased with what I have. A $199 emulator machine that streams mp3's and plays Divx on my HDTV. Fully upgradeable. Not to mention this is only first generation software....