It's not illegal to mod the Xbox, or tell anyone how to. You bought it, you can do what you want with it.
Pirating software is illegal, but having the ability to isn't. You can import, run your own software, use it for parts, it's your choice.
Microsoft may tell you its illegal. Mod chip companies can get sued because mod chips promote the use of pirated software, similar how Napster isn't illegal, but it promotes illegal activity. Microsoft would likely say modding it's illegal, just how most companies will tell you that making backups of your software is illegal. But according to US law, you have every right to backup your software, music, movies, etc. But of course, distributing it is illegal.
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