Microsoft has acknowledged that there are problems with many of its Xbox 360 consoles and has extended the warranty to three years while earmarking more than $1-billion to cope with shipping and repairs of the affected products. 

Apparently many of the machines are suffering from "general hardware failure", but Microsoft hasn't been forthcoming with additional details.
It is introducing from manufacturing and production changes which should reduce the problem going forward.
Meanhile, Microsoft has recorded a charge of between $1,10-billion and $1,25-billion for the fiscal fourth quarter to cover the additional costs of the warranty extension.
The company will now repair or replace free of charge any game machine that experiences a general hardware failure – indicated by three flashing red lights – within three years of the time of purchase
According to independent sources, the company has lost about $6-billion in the entertainment and devices division since 2002.