The Xbox360 RROD is a fundamental design issue and there's nothing Microsoft can do to just "fix" it, without redesigning the console. Which I guess would cost them more than the $1 billion they set aside for 3-year warranty.
They've always been good at throwing money around, they were just never good at properly testing their products and shipping a final version. It's a pity Xbox360 isn't a software product, otherwise we'd have SP2 by now and most things would work fine
Having taken apart two 360's that died from RROD and fixing both, I can tell you that they've tried to improve the heating a bit, by adding a heatpipe and another small heatsink to the graphics chip. The one with the extra cooling was 2 years newer. Also the power supply is smaller, so I'm guessing the CPU is a die-shrunk one with less power consumption and thus less heat output.
But the problem is the graphics chip and the conditions under which it runs. Microsoft are forced (at least in europe) to use lead-free solder for environmental reasons, and it's prone to cracking (tiny hairline cracks) in extreme conditions. Those extreme conditions are unfortunately constant in the Xbox360. The graphics chip sits underneath the DVD drive and there is no room for decent cooling. They've put on it a wide heatsink which has few fins, widely spread apart. Anyone can tell you it's not good, heat dissipation depends on surface area, the more fins the better, the taller they are the better, the thinner they are the better (as you can fit them more densly).
This chip gets extremely hot, I'd guess it can go over 80 degrees no problem, and then when you're finished it cools down to room temperature (20 degrees?). Keep doing that and the solder will crack and you get RROD.
The fix? Heat up the graphics chip to melt the solder underneath it and cool it back down... lol but it works
I'd guess that the watercooled ones never break down. They get the smallest temperature fluctuations which is good for all the components.
M$ could put in a slimline DVD drive and get more heatsink space for the graphics chip, or redesign the console to allow more room for it... but i guess that all costs more money than they want to spend.