Actually they are making profits on their games division, and it is another divison that covers the warranties and gives away millions of free 360's due to its Epic failure rate.
Well if you want to get that specific, they're making a profit from the E& D division. What I meant was Project Xbox is now profitable and its more than likely the arcade is sold at a small loss and the Pro and Elite make a small profit.
Microsoft don't give away millions of free 360's. The failure rate isn't so "Epic" anymore and an RROD 360 can be repaired and sent back out.