Yup. Turn off dipswitch 4. This will turn off the modchip, so that you should be able to connect to Live. If it's on, the bios protects your system by blocking Live so that it thinks there is no connection. If you connect with the modchip ON in any way, your xbox will become permanently banned.
When you want to play backups, DivX etc again then re-enable your chip. (Turn Dipswitch 4 back on)