I wouldn't put a mod-chip in just to run emulators. You can softmod the dashboard to get XBMC4XBOX running and run any emulators you might want. Granted, I suppose if you're going to mod the Xbox in any way, might as well go the whole nine yards, right?
As far as great games for the Xbox, you'll be pretty safe with basically any of Bioware's RPGs (Jade Empire, KotOR/KotOR II), obviously the Halo games get a nod for those looking for "essentials," and I'd definitely agree with Fable being a must-play alongside Forza Motorsport. The Oddworld games are pretty solid, too, and I had a lot of fun playing Mortal Kombat: Deception, though it's definitely not everyone's cup of tea.
Also, the GTA games were so much better on the Xbox than on PS2 (IMO). If you haven't played them (or played them to death), go for those! I'd also throw Conker: Live and Reloaded out there, but if you have the chance, go with BFD on the N64 (better game overall). Then I'd look more towards the lesser known games like Yager, Crimson Skies, Panzer Dragoon Orta (huge Panzer Dragoon fan, so have to throw that out there!), Stubbs the Zombie and games of that nature. There's a huge library of great Xbox games worth looking into, but the ones listed here so far definitely form a good foundation!
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