Thats not all though... Although backing up games IS one of the main reasons people mod them, its not the only one, and not necessarily the best one.
a great place to learn about it is from the screen savers (
http://www.thescreensavers.com) Kevin Rose did a good 5 part segment, which should answer almost all of your questions.
My main reasons for wanting a mod chip, are for backups (for quicker loading time, and so I dont have to swap discs to change games), and to do that I need the chip so I can also install a 120gb HD, so I can also store ALL of my music, plus my DVDs, and my games, all one one hard drive. Basically, it becomes a "lite" version of MS Media Center.
Check out the link above, they really do answer most common questions, including the legality of the whole thing