The most obvious is a local network of Xboxes, but there are several other options for head to head play on the Xbox over the Internet without springing for the license fee. I found a very interesting article by Brian Livingston at [Infoworld] about alternatives to XBox Live.
One huge problem for many users is that Xbox Live permanently blocks any units that have ever been modded. Even if you remove the mod chip, the unit still can’t talk to the Live service.
The coolest option is the Xbox Gateway. It’s a gateway for your Xbox to let it talk to other Xboxes over the Internet without using an intermediary. You have to run it on a PC with LINUX, but the developer is working on a version that will boot from floppy so you can use it on your PC without screwing up Windows.
Another nifty choice is the GameSpy Arcade. It requires a couple of PC programs to tunnel the SystemLink traffic, but looks pretty easy to configure. Most SystemLink games work and you then have free access to play online. For a one-time $20 fee, you can play ad-free on their network.
Neither of the above options require any modifications to your Xbox.