I hear a lot of talk about "is it legal?". "MS Can't do that". "How can they ban you for a bigger HD"...
Bottom line:
There's no real legal precedent (yet) on whether or not modchips in general are legal, or whether modding your Xbox is legal. Personally, I think it should be. I bought by Xbox, it's mine. I own it. If i want to take it apart and mess with it, I should be allowed to. If I want to rip chips off the board and use them for my own personal projects, I should be allowed to.. period.
As far as XBOX Live:
This is a service provided by MS. MS wants to make sure its online games are played fairly, and that noone gains an unfair advantage in online games by using modded boxes and being able to modify game files (and, obviously, they want to make sure you BOUGHT the games). In this respect, when you connect to the service, you have to play by their rules, plain and simple. If you pay for the service, and you break the rules, they can and WILL ban you.
MS can and will check for: larger hard drives than stock, modded xboxes, etc.
If you're using a gamertag that has been associated with a modded xbox, it looks like they'll let you recover it if you play nice and use an unmodded xbox to play on Live with. If you mess up again, it looks like they ban you, and permanently.
Instead of bitching and moaning and spending countless hours trying to figure out how to get around the system, why not use a HD splitter or an Xtender mod with your ORIGINAL, UNMODDED HARD DRIVE FROM THE BEGINNING?!?! I know it's too late for many people NOW, but there really should be a guide for newbies that says the following:
When modding your xbox, get a new hard drive, get a mod that allows multiple hard drives (splitter cables/xtender mod). Back up your original hard drive. Install new hard drive. ONLY USE YOUR ORIGINAL FOR ORIGINAL GAMES. Do everything else with your new hard drive.
Unfortunately, it looks like if you've screwed up already, you may be shit out of luck. Solution: Go buy a new xbox. Yeah it sucks, but I'm sure you can find a used on in your local newspaper for like $70. Then, you'll have one you can use only for mods, and one you can use for live. I don't know how much people are paying for extra EEPROMS, but I'm hearing people who have done it 7 or 8 times. Even iff EEPROMS are going for $10 a piece, you could have already bought another used xbox by now. Either way, you're going to have to spend a little extra $$ to get what you want.
Life sucks, get a helmet.
--NipsMG