Documents filed with the US financial watchdog show that Microsoft's Home and Entertainment division, which includes the Xbox, lost $177m (£112m) in the three months to 30 September.
Since the Xbox was launched Microsoft has been forced to cut its price twice to boost sales.
The documents also reveal that four of the seven divisions of the company are operating at a loss.
Cash pile
The figures revealed in the documents filed with the Securities and Exchange Commission were prepared with Microsoft's internal accounting system.
These figures have been eagerly awaited by industry watchers and analysts as they give a more detailed picture of the state of Microsoft's business than does the accounting method used to report quarterly earnings.
In the quarter ending 30 September, Microsoft's Home and Entertainment division reported revenues of $505m.
It lost $177m, up from a loss of $68m in the same period in 2001. This loss is by far the largest of Microsoft's unprofitable divisions.
By comparison Microsoft's mobile devices division lost $33m and its MSN net service lost $97m.
Gaming experiment
The loss in the home entertainment division has been put down to the high cost of marketing the game console and absorbing the cost of the price cuts Microsoft has been forced to get people buying it.
The losses of the division look set to accelerate as Microsoft launches the Xbox Live service which lets people play each other via the internet.
It said it would spend $2 billion over five years to fund this online venture.
Despite the losses Microsoft will not have to rein in its marketing and promotional efforts any time soon. The company has a cash pile of more than $30 billion to fund expansion.
Even if it did not have this huge amount of cash on hand the $3.5 billion profits from its operating system and software divisions in the quarter more than offset any loss.
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