Microsoft said on Thursday that it will extend the warranty on the Xbox 360 -- a move that will cost the software behemoth over $1bn -- after an investigation showed the game console can be prone to hardware failures.

"As a result of what Microsoft views as an unacceptable number of repairs to Xbox 360 consoles, the company conducted extensive investigations into potential sources of general hardware failures," Microsoft said in a statement.

Microsoft said its probe found "a number of factors" that can cause a general hardware failure indicated by three red lights on the console. The company said that, in addition to extending the warranty, it has made unspecified design changes to the product.

Microsoft said it will cover machines that experience failures for up to three years from the date of purchase. To cover the cost of the new policy, Microsoft said it will take a pretax charge of $1.05bn to $1.15bn in its just-ended quarter.

"The majority of Xbox 360 owners are having a great experience with their console and have from day one," Entertainment & Devices Division president Robbie Bach said in a statement. "But this problem has caused frustration for some of our customers and for that, we sincerely apologise."

Microsoft also disclosed on Thursday that it failed to reach its target of selling 12 million Xbox 360s by the end of its fiscal year on 30 June. The company sold 11.6 million units, CFO Chris Liddell said during a conference call.

"That is slightly shy" of its projections, Liddell said, but added "we're happy with that number."

Read the full story click below

Reports of glitches with the Xbox 360 began cropping up shortly after its November 2005 release. While the company downplayed reports of faulty hardware for the better part of a year after launch, last September it acknowledged that its original batch of systems was failing at an unusually high rate. Microsoft extended the standard 90-day warranty to a full year, and promised to reimburse those customers who had already been made to pay for repairs.

In April, the company once again tweaked its warranty service, saying it would no longer charge shipping on repaired Xbox 360 consoles, and would extend the warranty on those repairs.

Software not a factor:
In an interview with CNET.co.uk's sister site GameSpot, Peter Moore, vice president of the Entertainment & Devices Division, said he was personally sorry and apologised to all those who had experienced a failure.

"We haven't done right by our customers, and for that I apologise," he told GameSpot. "We listened, and we're going to make it right." Moore also posted an open letter to the 360 community on Xbox.com.

Moore rejected the notion that the Forza Motorsport 2 racing game was "bricking" consoles. "It's not a software issue, guys," he assured GameSpot. "It's a variety of hardware issues which we're taking steps to rectify."

In a conference call, Bach said no safety issue is involved with the problems.

In September 2006, Microsoft acknowledged that the earliest Xbox 360s were prone to problems and agreed to cover all costs of repairs on consoles made prior to 1 January 2006.

But for some Xbox fans, that hasn't been enough. Take, for example, the case of Rob and Mindy Cassingham, of Moab, Utah. From the Xbox's launch in November 2005, until February 2007, the Cassinghams went through six defective Xboxes before deciding to sell the seventh and give up on the console, according to Dean Takahashi of the San Jose Mercury News.

Others, too, continue to be dissatisfied with the Xbox's quality, even in more recent months. "My Xbox 360 is dead. I have only had it for a little over a year. I spent $400 (£200) on the system, and another $800 (£400) on games, and I have a dead system," Kyle of Duluth, Minnesota, wrote on ConsumerAffairs.com, a site brimming with angry Xbox users' testimonials of their poor experiences.

"Microsoft wants $140 (£70) to fix this thing, and out of complete honesty, I'm not going to get it fixed. I'm absolutely angry about this. They have a substantial amount of systems with problems, and it is widespread. It isn't just a slight problem, and someone needs to speak up about this. I'm so sick of seeing all of these people being taken advantage of by a company that is based around greed. They should be fixing these systems for free. Too many people are having these problems."

Microsoft said it will reimburse customers who have already paid for repairs for the hardware problem that is indicated by the three flashing lights.

And while no direct correlation has been drawn between the Xbox's quality assurance issues and sales, the console has not managed to dominate the industry the way that Microsoft had hoped. While the Xbox did control the next-generation console business for the year it was the only entrant, Nintendo's Wii has since grabbed the top spot.

According to The NPD Group, the Wii is the current leader in sales, topping the Xbox and Sony's PlayStation 3. In its first month, the Wii sold 476,100 units and a total of 1.516 million in its first three months, while the Xbox moved 323,400 consoles in the first month and 854,300 in its first three months. The PS3 sold 511,500 in the first month and only 1.253 million in the first three months.

News.com's Daniel Terdiman and GameSpot's Tor Thorsen and Brendan Sinclair contributed to this report.