Modding is a Grey area when it comes to being Illegal. Now imma say this, weather it means anything to you or not, But I have a Bachelors in Criminal Justice / Cyberology as well as a Masters In ComSci Minor in Mathematics
Ive done tons of studies on the DMCA. Any Basically what it boils down to Modded consoles are fine. Where it gets illegal is most people mod there consoles to make copies of games. Anytime you copy anything that is digital and has some type of copyright protection on it. and you copy it, EVEN if you own the game. Its against the law. Bottom line. This goes for Console games, DVD's , BluRay, Music CD's, Music CD's are a little different though they have a complete other set of rules.
But If your playing a game and you do not OWN it, its illegal. Here is some info on the DMCA
http://en.wikipedia.org/wiki/Digital_Millennium_Copyright_Act