Microsoft told IGN this week that it has banned a number of modded Xbox 360 consoles from the Xbox Live service.

Microsoft’s spokesperson also provided a reminder to Xbox Live users thinking of modding their own consoles:

All consumers should know that piracy is illegal and that modifying their Xbox 360 console to play pirated discs violates the Xbox LIVE terms of use, will void their warranty and result in a ban from Xbox LIVE.

Although Microsoft has been especially active in banning consoles in the past week, the company also points out that its policy is ongoing, and Xbox 360 consoles found to be modded or playing pirated games may be banned at any time.

Microsoft has announced that it will give away Undertow for free to Xbox Live gamers who download the game between Wednesday, January 23, 2008 and Sunday, January 27, 2008. The game will be available to all Xbox Live gamers, including both the paid Gold and unpaid Silver subscribers.

Undertow is a 3D underwater shooter game available on the Xbox Live Arcade. The game carries 3D graphics beyond that of most of the arcade titles available on Live, which consists of casual games available in the $10-15 price range.

The free game offering is officially a thank you to Xbox Live’s subscribers, but the game was originally promised as compensation for network troubles experienced by the Xbox Live service during the 2007 holiday season. Despite the offering, a small group of gamers has sued Microsoft for $5 million U.S. Because of this litigation, Microsoft has announced that it is unable to comment further on the downtime issue, or on the status of the Xbox Live network.