to mod the machine basically you just change the firmware of the dvd drive that is in it, you can still play xbox live on it but if you get caught, like one of the other posters said, your machine will be banned and even if you "un-mod" it you still will never be able to play online with that machine again
however, if you stay on different message boards you will be able to find out when updates are coming out for live and you can update your firmware by re-moding your machine so that it gets around the live update and you wont be detected
personally, i dont play it online, i would rather get free games than play online...just my opinion though
do a search online and you will find out how to mod the machine... good luck