I bought my 360 maybe 6 months after it came out. The other four people I know in 'real life' who own them have never had any problems with them.
I honestly think that its just blown way out of proportion, but Microsoft should have a policy like this because it seems than any faulty systems really are defective.
Well, I don't think it is blown out of proportion. My brother, and his close friends (~ a dozen +), grabbed the 360 within a few months of launch (a few got theirs on launch day). Basically, once one person saw how neat the 360 was, there was a domino effect and everyone eventually got one.
I can tell you how many units have had serious issues (not simply the Red Rings) -- easily 4-6 of them, and at least 3-4 had to be "fixed" / replaced more than 2 times. The only thing that prevented them from getting really, really p*ssed off was that they would shift their attention back to WoW. But they were still pissed (because they love 360) *and* because many of them have had at least one unpleasant experience with customer service when trying to resolve the hardware problems.
I should point out that they experienced problems even though they were using cooling fans to improve ventilation and despite the fact that they "pamper" their consoles more than the average video game enthusiast.
I'm sure there are tons of folks who haven't had a big problem with 360, but something definitely is going on.