You need a patched system menu IOS or other patched IOS to load a restore disk. The disk won't get past the security checks otherwise.
Did the 4.2 update take? Does recovery mode show 4.1 still or 4.2? Go into recovery mode without a disk in the drive to find out.
You will have to remove your modchip to install the 4.2 update otherwise it will just keep autobooting the game rather then installing the update. This is of course assuming you have a legit retail game and not a burned copy of the game.
I'm also assuming you don't have bootmii as boot2 or priiloader correct?