GameSpy have posted part 1 of a 3 part article which looks at Console Piracy. This first part takes a look at console modding to allow pirated games to be played:
In the United States, many PlayStation 2 and Xbox owners have "modded" or modified their game consoles. The term "modding" refers to the process of adding special chips to game consoles that disable security mechanisms meant to limit the kinds of discs these systems can read. Companies such as Sony, Microsoft, and Nintendo build security chips into their game hardware. Security chips look for codes or other protections that game publishers build into their games. If they do not find these protections, they lock the software out and will not play it.
Adding security precautions to game systems is standard practice. Nintendo built a "lockout" chip into the original Nintendo Entertainment System (NES). Finding ways around security precautions is also well established. Companies like Paneision, Wisdom Tree, and even Atari published unauthorized NES cartridges with devices that disabled Nintendo's lockout chip.