If I buy a clock-radio that I want to make into a CD player by using parts from my portable CD player, I should be able to. GE can't come and sue me for modifying MY radio. If I want to add MP3 player capabilities to it, I can with off the shelf parts, the same rules apply to X-Box.
These "mod chips" aren't the issue. You're right, you have the legal right to do whatever you want with an XBox you pay for.
The law is broken because modded XBoxes have a hacked version of the Microsoft COPYRIGHTED BIOS on them. (I know this because *cough* a friend of mine has a modded XBox.)
This modified BIOS causes the XBox to recognize a far larger hard drive than the one that ships with the system, and permits copying RENTED games or borrowed games to this larger hard drive, effectively allowing the owner to keep a game on the system he never paid for.
This second issue is called theft and/or software piracy.
To summarize, you DO have the right to mod your XBox. As soon as you drop a hacked BIOS on it, you are in violation of federal law, and will be prosecuted if caught. You exacerbate the crime if you choose to use your illegal XBox to pirate software.
Now if they were just selling the chips and instructions on how to modify the system boards, that's another story, as that, then, becomes a private property issue. If this were an issue, we'd have a society spiraling out of control in a litigious quagmire where everyone can sue anyone for anything at any time. We wouldn't want that now, would we... wait...
/sarcasmOff
Nope your wrong so says the DMCRA. Reverse engineering, once a protected activity and considered to be integral to innovation, is now an illegal activity.
Just discussing how one might go about it is a crime.
the DMCA says its a crime.
and there are some new bills floating around backed by the MPAA and RIAA that essentially outlaws privately owned DVR technology.