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I think all first incarnations of consoles inevitably "fuck up."
I'm on my second x-box and my second gamecube and my nephew reported the other day that my PS2 was making a funny noise.
mandal is right on the money with why the good folks who tried to play Halo 2 on X-box live were banned. It has nothing to do with the disc itself rather the security kicks in when you connect to Live.
My first x-box had the dreaded thompson drive and it petered out after about a year and a half of pretty solid gaming. It started with errors reading just a few games and then moved on to not reading anything. The second one, however, has soldiered on marvelously including several massive sessions of Halo 2 multiplayer.
My advice is since it isn't reading the damn thing anyway, break it open and replace the DVD drive. There are more than few sites that explain how to do it and it's a helluva lot cheaper than forking over money to Microsoft to "fix" it or get another one.
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