I understand that a mod chip is needed, but what is the technical reason why? I mean from what I understand, it bypasses the security check -- but, when you capture the ISO, why doesn't it capture the security that is on the original disk? thanks

You don't need a modchip. You do, however, need a firmware hack.

Burned discs of backups you made don't report as "xbox 360 media" to the console, they report as DVD-DL or DVD-ROM, so the console won't boot.

What the firmware hack, or modchip (in case you go that route, there are modchips after all) is fool the console into thinking that the disc is a real xbox 360 media disc and it will read it accordingly.

Of course, that's the simple explanation, I'm sure more knowledgable people can come up with a more detailed explanation, but I think mine will suffice.

Interesting. So one of the two is true. Xbox games are burned to a special type of DVD, where somewhere on it is a data layer setting it as an xbox disc. Or two, when the disc is pressed, it isn't burned so it isn't + or - so it isn't either, just a pressed image. Do I have tha correct?

Yes, original discs are pressed, not burnt, and have data on places where a normal burner cannot write (or something like that, I'm far from being an expert).

That's why you need modchips, hacks or any type of modifications so the console is fooled into loading what you want.

Interesting. So out of curiosity, why don't people invest time in modifying DVD Burners that CAN reach the outer rims where normal burners cannot?

becuase blank DVDs cannot be written to in those areas

is a mod chip undetectable by Microsoft on live? or is hacked firmware still the best route to go?

There is no such thing as a truly undetectable method for XBL. If MS decides to invest the time and money they can find it regardless of what method you use. IMHO I feel that the modchips on the 360 are a waste as there really is no clear advantage to them at this time. That and I personally find it much easier to do a firmware flash then to crack open my drive and do soldering. It's all a matter of personal preference though.