Microsoft is in trouble, no question. Halo 3 is selling to... the people who bought Halo 1 and 2. Most of the 360's games mentioned in this thread as system sellers are nothing of the sort - they're shooters, action games and whatnot, that's 20% of the game market. Sales of the 360 are getting a holiday boost, but at $350, they really should be selling double their current rate.
It's their own fault. RRoD, disk scratching, hot and noisy consoles, no built-in next-gen DVD, etc. -- all self-inflicted wounds.
And now Bungie, the crown jewel, is leaving Microsoft. That speaks volumes about Microsoft's stagnant company culture, its inability to be anything other than just another giant corporate monopolist -- like AT&T, only with better marketing. It's depressing, because I really wanted someone to keep Sony honest at the high end of the market. Someone else will have to do the job - maybe Samsung.