The Red Ring (3 light) normally indicates a cooling issue. My console was one of the release units manufactured October 2005 and was one of what I believe to be last survivors of those until I got the red ring.
If your console is still under warranty, you can send it back to MS and they will repair/replace it. The problem though is that they don’t fix the issue causing the overheating: the X-Clamps. Microsoft used a sort of spring in the shape of an X to put tension on the heatsinks for the CPU and GPU. Its a great concept except that the material they used in the X Clamp seems to weaken over time, especially under the heat of the console. When this happens, the pressure on the processor heat cores becomes uneven, the thermal paste may be forced to one spot (and make a mess), and the heat transfer it was designed for doesn’t happen.
Origninally, I was going to do a custom case for my 360 where it would have a better fan and better airflow but after lots of reading Idecided to just try to fix it with screws and get rid of the dreaded X-Clamp. I had to borrow a special tool from a friend to open the case, and then used some torx bits to get to the bottom of the motherboard. Its a pain to get to, but with the tool and a quick search on youtube its not that bad.
The fix took about 45 min to do. I used arctic silver heat sink compound and a screw kit that I bought on ebay for $6. I tried my local hardware store, but the nylon washers they had were too thick and I didn’t get the right spacing. I would guess it is about 2mm, but that may be too much. The kit worked for me though. If you’re nervous about doing it yourself, I’ll do it for you for $40, but can’t gaurantee that it was the heat causing your RROD in the first place.
UPDATE: fixed system ran fine watchign DVDs and netflix for a few weeks. Playing Forza 2 brought back the RROD though. I then tried several other methods, but in the end will be replacing it with a new console (jasper chipset).