I've had my first Xbox360 replaced (RRoD) and refurbished to the same model. It also broke. I had it firmware updated and no means of getting it back to the original, so I found a local electronics guy who would take my old model and replace it with the new model (cooler and with HDMI) for next to nothing.
The towel trick was originally intended to have the console run warm and thus let the soldering tin melt back connections that were lost. (Awful soldering around the memory and graphics device were a great cause of errors on the first model).
Some have succesfully forced a RRoD error by using the same trick, but this obviously voids warranty if discovered. Still, if your only other option is a bricked console, it might be worth a shot.
I did have the same problem as you, and in my case I solved it by moving it to a more open space to allow better airflow. In other words, my problem was not with the drive, but rather with the cooling. Try placing it on the floor or a table and see if it is still a problem. If it is, you know the problem. If it isn't: towel and start a game if possible.
The send in procedure (in Denmark at least) is the following:
- Call MS
- Receive mail containing printable FedEx shipment slip.
- Attach slip to box (sufficiently packaged)
- Call FedEx to have them pick it up (or deliver it to them)
- Wait 2 weeks
- Get fixed or refurbished Xbox (if you're lucky, a newer model)
You do not ship anything other than the console itself: No memory cards, harddrives, power cable or anything else. Oh, and remember to remove any disc in the drive (especially if it's burned
)