Microsoft is pretty good with their warranty exchanges. The one caveat to that is that if you have a newer system, say one with an HDMI port and the newer (but not newest) Falcon processor, there's no guarantee that you'll get one back. You'll receive a reconditioned unit of whatever they have on the shelf.
I've exchanged one original 360 and the process is pretty painless. The unit I received has performed flawlessly for nearly a year.
btw, exchanging a 15 month old 360 is much easier than exchanging an 11 month old PS3. If you don't have a receipt, Sony will tell you to piss off or send $150 along with your defective console.