And strangely, mod chips are NOT illegal in Australia, and S0ny has taken the matter to court, and lost.
Why? In Australia you are allowed to install mod chips IF their main purpose not to override copy protection systems for illegal copying. The Xbox mod chip is designed to let unsigned code run, which isn't illegal. The PS1 mod chip is intended to override regional codes, which isn't illegal in Australia either. If, as a side effect, a copy protection is lost, well sony or M$ has to live with it, because their copy protection methods interfered with our rights.
Many CD copy protection systems like Starforce are not permitted for sale in Australia because they don't comply with the CD code of standards. Starforce CDs wont run in all CD players, so they cannot be sold as CDs or bear the Compact Disc label.
Hacking any device is legal, including any game system. Just as long as you are not pirating. So linux on Xbox is not illegal, and M$ has no right to remove people's rights to use a console that they own and use legally.
Now lets all live in Australia!