Ok folks:
I spent quite a bit of time trying to find out what the heck was going on.
There are -TWO- levels of problems.
1 - The "can't connect" connectivity issue.
I still have no idea why this happens, but it seems to definitely be a Kerberos problem.
If you go into the Xblive control panel and try the connectivity test, you SHOULD see all the icons appear with no RED ICON.
If you get a single red icon at the bottom, you have the connectivity problem.
I have been unable to get past this on afflicted machines with or without mod chips installed.
2 - The actual game play issue if connectivity test is ok.
If you have connectivity and try to fire up, say MOTOGP Online from the retail disk, the very first time you launch it you WILL be connected (mod chip or no mod chip) and you will be notified that an update is required.
The update downloads some new code to your Xbox which adjusts the connection servers for the game you are trying to launch.
In all cases, mod chip or no, kerberos authentication does occur.
-AND- (drum role please) the downloaded code -DOES INDEED- detect mod chips!
Once the download has occurred you can SWITCH OFF the mod chip and revert back to the OEM BIOS.
IF YOU DO, XBLive does work fine on your modded machine, EVEN if you have replaced the console with Evolution-X!
So, yes, I'm eating it a bit on this one. The downloaded "checker" code was new to me until I had a chance to see it in action.