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1) None! Hehe, just kiddin'. If you can find a decent used one, go for it. Consoles aren't like computers, most older ones run fine for years. Not entirely sure on the specifics of the X-Box, but any system, if it's in decent condition, should be right. They all include the HD, too.
2) Dunno about mod chips, I don't like them myself.
3) If X-Box live detects illegal modifications, it'll lock you out. Pretty simple. I don't think you can copy games as-is, though, so in your case it looks like you'll be getting a mod in.
That should answer some of it, maybe someone more into illegal stuff can help out more :P
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"'There's a tendency among the press to attribute the creation of a game to a single person,' says Warren Spector, creator of Thief and Deus Ex."
-- From an IGN game review.
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