My question is this: are softmods legal to perform, as I'm thinking of putting up some flyers around town and get some extra cash. If they are legal, what is the extent of things that can be done before it becomes illeagal?

they are not "legal" per se. In some countries (US for instance), it is unlawful to circumvent copyprotection, which is what a softmod does. Also, softmod installers come with retail files (that's why they can't be hosted on x-s), which to spread is illega. Some also come with a patched retail bios, but usualy, the "fully legal" nkpatcher is used. Anyways, back to the point: softmods are not realy lawful in some countries, if not most or even all (retail files)

EDIT: thinking about it, I think softmod installers actualy don't come with retail files. Iirc it uses retail files already on the HD. But then there's the issue of software that waas build using the XDK, and the remaining issue of "copy-protection circumvention"

So really, even if the softmod is legal, almost any app would be illegal unless it wasn't compiled with XDK?

Yes.

you can use nkpatcher and opendash which is not compiled with XDK

Supose you could extract the lib files from an xbe, so that the xdk code snippets are no longer in it.
Would it be legal to distribute such a file?
Would it be possible to find the library code snippets in the collection of legal games I am having?
I know it is illegal to reverse engineer those games, so I would leave that action to the end user if they want to do it.

Take for instance Xbmc. You can find the sources, but distribution of the binaries is illegal in most countries.

I know there is the opensdk, but it looks like a hell of a job to get something running decently with that.

regards.

Assuming a few things (some which are stretching things a bit):

1. You own the xbox and hence the right to all versions of the msdash. (Is this a valid argument??)
2. You have a game and you upgrade to 5960 dash with it.
3. You grab a copy of UEEE.zip. To generate 4920 dash files from 5960. Point 1 supports your claim.
4. You get a copy of Nkpatcher and compile it yourself. XDK-free.
5. You don't care about XBL access or Live safety.
6. You get a copy of the shortcut XBE which uses OpenXDK. Or a shortcut XBE based on nasm.
7. You piece together a softmod package with these contents:
a. 4920 dash.
b. Ndure fonts.
c. Nkpatcher. Configured to boot the shortcut XBE.
d. Shortcut XBE configured to run another XBE at a known location.

You distribute the softmod package. All your users own a xbox and the right to all these files. By itself, the softmod package is free of XDK-derived work. All it does is allow the user to run unsigned code like a boot disc.

Disclaimer:
The above points are purely academic and I've no intention of trying it out and I don't encourage anybody to do so.