taken directly off of the xbox website:
"An Xbox Live account is required to play Phantasy Star Online Episode I & II. To play the game online, Xbox Live subscribers will be required to buy a Hunter's License, which will give gamers the ability to travel on wild adventures with other Phantasy Star Online Episode I & II gamers. It also provides access to a plethora of online exclusive content, such as seasonal quests, downloads, and rare, in-game items. The Hunter's License is free of charge for the first two months and, after that, will carry a service fee of $8.95 per month. For Hunter's License billing questions, or to cancel, call 1-800-4-MY-XBOX and choose option 3."
so basically, you HAVE to have an xbox live account just to PLAY pso (offline). if you want to play pso ONLINE, then you gotta shell out an additional 9 bones a month. whatever happened to the good ol' days of it being able to play it online or offline for FREE on the dreamcast (at least the 1st version). but anyways, since your friend probably had an account on his xbox (assuming he has xbox live), then you might not even be able to play the game online (as the serial numbers i believe are only good for one account on one xbox), but i might be wrong...