It looks as though "a very small number of Xbox 360 owners" are experiencing disc read errors when applying a mandatory firmware update, but according to Major Nelson, the issue has arisen from a previous firmware update, and not the system update currently in public beta which is scheduled to start rolling out tomorrow.
According to the Major's post, the new disc format that is part of the beta has been "rigorously tested across all Xbox 360 models and there are no known compatibility issues."
Earlier, it was thought that beta testers were experiencing the issue with the “updated Xbox 360 disc format" firmware, but as of the original post time, we had not received any word back from Microsoft when emailed, so it's good to know this was indeed not the case.
The issues experienced by a previous firmware update were verified by Microsoft Support, which stated that the firmware is not working with certain DVD drives, and with the various revisions to the system over the years, some drives are getting borked.
According to an email sent out by Xbox Customer Support, the issues are detectable over Xbox Live, and if a 360 system breaks because of the firmware, folks will be sent a new 250GB Xbox 360 S and a free year of Xbox Live."
The new Xbox Live update is expected to go live tomorrow in some regions, and the firmware update is not only being issued for anti-piracy measures, but will also provide an extra 1GB to the disc storage capacity.