There is a update due before the year end that will plug this loophole and modded machines cannot be used on live. The machines will also be disabled/crippled and your gamertag permanently locked.

I had a nice little chat with an old buddy who used to work for the US customs but now works for MS. He was wandering around golden scoping out the shops selling modded machines & fake games.
He confirmed that the last update did disable a lot of the early modders but the upcoming one would be the final nail in the coffin. This would be a "sneak" update so users would not know when it would be available. He also mentioned something about serial detecting and blocking. A lot of his technical info did not make much sense to me.

The bottom line is if you have a modded machine (firmware or chip) DO NOT use it on live ever... with copy discs or the real deal. The dealers in SSP selling modded machines are no longer honoring any warranty they previously offered if the box has ever been on Xbox live.

Just a heads up... There's loads of info on the XBL forums about MS's plans to stop modded machines from being used on live. ..Check them out. Again this only applies to the Xbox360.