Update: Microsoft just sent us an email to clear up that the disc read issue is tied to a change in the disc reading algorithms in a previous software update – NOT the upcoming update that has been in beta, as initially reported -- and is NOT specific to older or newer versions of Xbox 360.

-- Original post below

Microsoft is set to push out a software update for the Xbox 360 that will enable consoles to run a modified disc format capable of holding an extra gigabyte of storage compared to current media.

The company announced a public preview program for the new discs back in March, giving those who registered at the Microsoft Connect site a free copy of Halo: Reach, in a disc using the new format so it could collect relevant performance information.

Although for the most part the trial was successful, it seems that the new disc format may not be compatible with older systems. Ironically, most gamers have already traded in their old Xbox 360 consoles at some point due to the infamous red ring issue, but there are still a number of customers who would be affected. Fortunately for them, Microsoft will replace their old units with a brand new Xbox 360 S and offer a free one-year Xbox Live Gold subscription for their trouble.

Microsoft will be rolling out the mandatory update to all Xbox 360 users starting tomorrow through May 30, after which affected users may see a 'disc unreadable' or 'disc unsupported' error on the screen when trying to load a game. Since the company can detect potentially affected consoles over Xbox Live, they have already begun sending out emails to users with instructions on how to claim their replacement console even before they experience any issue.

Additionally anyone who believes their system may be having problems can get in touch via the Xbox Support pages.

Current dual-layer Xbox 360 DVDs can hold just 6.8GB out of a maximum of 7.95GB on a standard dual layer DVD, but the new 'XGD3' format reportedly recaims the remaining space by trimming obsolete anti-piracy measures residing in that section of the disc. Games using the new disc format have yet to be released.