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[red_ring_of_box]

Fallout 3 is full of bugs in its unpatched state, so yes you should update, as for your modded xbox I don't know seeing as I don't know how M$ checks for things that could get you banned but I do know you should patch Fallout 3 as soon as you can. Heck I even get freezes with it being fully patched now and again. If that doens't work then all I can say is try reloading a save from before your face off against the Trogs and the Wildman to see if that fixes the level up problem.