Relax for a moment. Breath.
Just having non-MS-approved files on your Xbox HD, such as emulators, isn't a reason to panic. MS could scan your whole HD looking for reasons to ban you but I doubt they will ever do this because it could lead to problems for non-mod users. However, trying to run non-original game copies on Xbox Live is reason to worry. Apparently Ray here tried to use a copy of Mech Assault on Xbox Live instead of the original Mech Assault game disc.
So far as I can tell, if you try to cheat on Xbox Live you either will fail out right or succeed only long enough to tell everyone. Then the exploit will be shut down by MS via Xbox Live.
A modchip is probably the best solution for people who want to play on Xbox Live because it is easily turned off. Many of the perminant software hacks, such as the font exploit or TSOP flashing, are probably easily detected by Xbox Live and may lead to banning. Although temporary software hacks such as using 007 or Mech Assault EACH TIME you boot the Xbox, are safe since they don't need to alter the Xbox dashbord software itself. Keep in mind that if you install the Xbox Live updates for Mech Assault the Mech Assault save exploit will no longer work (on said Xbox).