it MIGHT be overheating, but much more likely the graphics card inside it has just been bumped out of place. with three rings, i think you can get it fixed for free. contact customer service about it
If your new 360 is a second generation or newer (which it should be, unless you bought it used), you may be alright putting it in an entertainment center. Just make sure you have at LEAST 2″ of clearance on all sides. If your cabinet has doors, make sure you open them up while playing, even if it’s an open-backed cabinet.
If it’s a first generation box (Xenon or Zephyr motherboard), then I would strongly discourage placing it inside any enclosed area. You can tell which version you have by looking at the power supply connector (the end that you plug into your console). If there is a peg in the middle of the two rows of plugs, then it’s first gen and you should keep it as cool as possible.
I have a first generation (in fact, a launch day system) that I’ve never had a problem with, but I never kept it in a cabinet, and I never put a third party intercooler on it.
I also have a Halo system (Falcon) which I have kept in my entertainment center since I got it, and I’ve also had no problems with it. I keep it on a shelf by itself with 2″ of clearance on the sides, and 6″ above it.
Both the Falcon and the Jasper (started shipping 4th qtr 2008) are much, much, much more reliable and deal with heat so much better than the first run systems.
doesnt matter were you put it, you will still get RRoD.