OK, now I get it, you didn't mention the 'I want to use Xbox live' part.
That error code indeed indicates that you need to lock your hard disk.
There are several ways to lock it, but still make sure you know what you're about to do.
There are tutorials on configmagic and xboxhdm on this site forum.
You might want to check this thread :http://forums.xbox-scene.com/index.php?showtopic=167408
It explains all error codes and offers solutions for most.
According to that page, if you have the 'Slayers disk', downloadable from 'the usual place' it should be just 1 'click'.
You might want to use 'XBconnect' or 'KAI' to play online instead of XBox Live, both services are free of charge and can be used with backup copies of games. (For XBox Live you'll need an original copy of the game)