Our Xbox 360 suffered the dreaded three red lights some time ago. This is when three of the segments around the on/off button show up as red instead of green. This signifies a major hardware failure, hence the usual name: Red Ring of Death (RROD).
This is a common problem and there are suggestions on the net that there is a major design defect with the Xbox 360 and a much higher return rate than Microsoft previously advised. Microsoft recently extended the warranty period retrospectively on these consoles. Sadly, our unit is outside of the new warranty period (at least, we think it is – cannot find the receipt).
A google around will provide you with lots of theories on what the problem is. My favourite theory goes that Microsoft reduced the size of the heatsink on the GPU (graphics processor unit) to improve the clearance for the DVD and also that there are some poor solder joints that have dried out and cracked.
On YouTube there are lots of videos telling you how to repair your Xbox 360. A popular techniques involves wrapping your unit in towels and overheating it. This is, I assume, designed to cause the solder to melt and self repair!
I have decided to go with the option of remounting the heatsinks using better quality thermal paste and replacing the current x-clamps with more flexible bolts. I should be able to get what I need from the local hardware store but have decided to invest in one of the better quality kits off of ebay that provides both quality paste, the correctly sized bolts and washers and also the tools needed to take the system apart. Cost is around £7 including posting (cheaper kits are available but I preferred buying from a PowerSeller who seems to have done his homework).
For those interested in trying this out for themselves, I found a useful guide that even tells you what to buy from B&Q.
In the meantime, we have a Sony PS3 to play with.