Ok well, here is what I did...
I have roommates who know nothing about xbox and modchips and banning... all they know is that the power button turns it on. So this helps clairify things for them, which is why I did this in the first place. It's not exactly an external matrix led, but it does illuminate whenever the modchip is disabled. Thus indicating XBL is safe to use. This is a fairly simple mod to do, and will definatly help save your xbox from being banned. Now if you have a matrix, you could use mode 3, which many people do. However, in my case I wanted to make things simple like throwing a switch.
First off, I'm using a v1.0 xbox with a matrix modchip.
1- The first thing you want to do is fix some external switches to your xbox like in the pic below. This will save a lot of time later on, instead of having to take apart your xbox to get at the dip switches on the actual chip. There are many tutorials on how to do this, so I won't go into detail. The best way I found was to use a 3 prong attachment. This way the modchip may be removed very easily.
2- Use 2 DPDT toggle switches (which you can get from radio shack). This allows one side to be used for the modchip mode selection (ex. ON/OFF). And the other side for LED (ON/OFF). Thus the two switches simultaneously control mode selection and LED power. With the right configuration you wire it up so that when both switches are ON, the LED is powered.
3- To power the LED, I used a point on the back of the mboard, (the same point for the enigmah chip I believe. Just make sure its 3.3 V) It's point 21 @ http://www.xboxmodz.co.uk/diagrams/diagrams.htm
Just run one wire to the led, and the other to ground (metal case of xbox is good). I placed the led through a vent in the front of the xbox so that it was very visible. Fits nicely to.
Any other questions or further explanations feel free to ask. Hope this helps.