If your machine is from "the golden years" 2001-2004ish, you won't need a mod chip, provided you don't want to access xbox live. Those machines are really, really easy to mod with 2 dabs of solder and a savegame exploit to allow you to flash the part.
If your machine is later 2004 onward, you probably have a "1.6" version xbox, and will probably need a modchip for it. Cheaper solutions, like the alladin XT or duox2 chips are about $20. They take considerably more time to mod, requiring a half dozen wires to be added to the backside of the motherboard.
Check the xbox identification guide on xbox-scene to figure out what version you have and proceed from there.
All modchips will need to be flashed-having them pre-loaded with MS hacked software would be (more) illegal.
If you have to buy a modchip, I suggest
http://www.llamma.com/, entirely because they are local to me (literally 3 blocks away from where I am right now) and cool folks.

-jeff!