Well, a couple of important things to keep in mind.
1) None of the things he pointed out
require a modified firmware image. Many users choose to use a modified firmware image out of laziness or convenience, but it is in no way a requirement.
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--Modchips can be used to install Xbox Linux (this is especially poignant, thanks to the Australian National University's involvement in the Xbox Linux project). Feel free to add other uses for Xbox Linux eg home mail server.
Xbox-linux can be run using the Cromwell firmware, which is compleatly legal
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--Modchips allow hobbyists to develop homebrew games/software.
Homebrew games/software can be written without the use of the XDK, which result in fully legal binaries. A great example of this is the OpenXDK Doom port. Now, of course, you're going to say "but this still requires a modified firmware image to run them...." which I'll get to on point #2.
Also, many xbox-specific applications have been written for use with xbox-linux.
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--Modchips can control LEDs and other cool case mods.
This is actually done within XeniumOS (on the Xenium, anyways) not a modified bios.
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--Modchips negate the artifical trade barriers put up by DVD region codes (controversial, but worth adding)
Not only that, but they also allow use of import games (not just movies) and even import consoles. (Why should only the Japanese get all the really nice limited edition consoles)
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--Modchips allow legal media files to be played on TV
Currently this only applies to xbox-linux, but we could also one day see media players such as XBMC compiled without the XDK.
2. Modified firmware images are not, in and of themselves, illegal. It is the redistribution of those images which is illegal. If a user were to copy the firmware image off of his box, modify it himself, and put that "hacked" image onto his chip in order to run legal homebrew, xbox-linux, etc.... no laws would be being broken. This falls well within the fair-use clause of the Berne Convention, and fits into the interoperability clause(s) of the DMCA and similar legislation.
Just to re-iterate with slightly different wording... The illegal thing about "hacked" firmware image is that they're redistributed in full. It would be legitimate for someone to produce a patch file or instructions on how to modify a STOCK firmware image, and would also be compleatly legitimate for a user to apply that instruction to his own firmware image, for the purpose of running legal homebrew/linux.
3. Mod-chips themselves are not intended to be used in any illegal way. It is the end-user who decides to use them for good or ill, not the designers/producers/distributors of those chips. The designers/producers/distributors can not make any decisions on behalf of the customer. (Actually, I should say "should not" as some producers DO indeed coerce the end user into illegal actions.... but such producers deserve these sorts of crackdowns.)
4. Most of what I've said here is aligned towards the xbox. There are some important technical differences between xbox chips and ps2 chips, especially earlier ps2 chips, which do indeed make the ps2 chips quite a bit more "questionably illegal."
5. While fundamental ideals are universal, specific wording of legislation changes drastically with jurisdiction, so acemilo has a bit of a point. American law is different from Australian law is different from UK law is different from Canadian law is different from..... It would be best to consult a local copyright attourny who is well versed in relevant case law before attempting to do any of this sort of validation of modchips.
Just thought I'd chime in on what is inevitably a very controversial subject.
--Arti