Full Features List for 2007 Fall Update
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    * Improved Video Library.
    * Improved visuals and descriptions.
    * Users can now sort movies and TV Shows in the video library by Title or (Download) Date.
    * TV shows can now be grouped by Series .
    * Group video and game trailers .
    * Art associated with personal video files on a portable device will now be displayed.
    * Easier to use media areas and improved metadata .
    * Improved source selection for video, picture, and music libraries, making it easier to switch between console/digital camera, computer, portable device or disc.
    * New "Suggested Items" link for downloaded movies.
Feature Details:
Media - All
    * Added more user friendly text for various error related messages
    * Added Shortcut keys from Remote Control: Pressing Play on a Video/Song/Picture will immediately start playback of that item from the list (pressing Start from gamepad does the same thing)
    * Added support for Album/Video artwork larger than 500kb
    * Added support to enumerate metadata in the background and not just when selected by the user
    * Added support to make sort options sticky across console reboots
    * Added support to show all available Media Sharing Servers on the local network and allow automatic re-affiliation
    * Automatically delete older versions of Optional Media Update package when new ones are downloaded
    * Improved consistency in storage naming across all areas
    * Improved performance for displaying Album Art when connected to remote sources
    * Improved text messaging when connection to PC is lost when streaming Music/Photo or videos
Media - Music
    * Added support for CD Playback from music area in Xbox 360 Guide area
    * Added support for listing multiple computer sources in Xbox Guide music sources
    * Added support for Y button to toggle full screen on and off for music visualizer
    * Disable 'play all' button when folders only contains playlists (with no audio files)
    * Disable Y button when no list items selected in Music player
    * Improved device support for new iPods (classic and 3rd gen Nano) - iPhone and iPod touch are not supported
    * Improved error handling for mixed encoded playlists (aac,mp3,wma)
    * Improved handling for MTP Music devices with >200k entries
    * Improved handling of game background music after playing videos in Dashboard
    * Improved handling of music playback over games (if music source terminates or has errors, background music returns to game background)
    * Improved performance for "Play All" with attached MTP devices
    * Improved performance of music enumeration via Guide
    * Improved robustness when playing back HFS+ formatted iPods
    * Improved support for returning to game background audio when user's music player session terminates
    * Improved support for scrolling song lists while listening to music during game playback
    * Improved support when ejecting game disc while selecting music source through Guide
Media - Pics
    * Added support to display PNG files when streamed from Windows Media Player 11 on Vista
    * Improved enumeration for PTP cameras including Cannon Powershot SD 630 and Apple Iphone
    * Improved playback performance of "Play All" when PC source has 1000s of photos and subdirectories
    * Support Folder view of Photos from MTP Portable Devices
    * Media - Video
    * Added 2 line support for entries in the Video Area of the Media Blade
    * Added ability to recognize Colorspace attribute for Video Marketplace Content
    * Added fade in transition for start of video playback
    * Added full screen buffering animation for streaming videos from Xbox LIVE
    * Added Suggestions scene for Video Library area in Media blade of the Dashboard
    * Added support for 16x Fast-forward/Rewind
    * Added support for AC3 embedded audio (see video faq for full information)
    * Added support for enumeration of video files from Zune 2.0 devices
    * Added support for Left Shoulder button on controller to chapter skip backward
    * Added support for Left Trigger button on controller to rewind
    * Added support for moving past the point user has viewed when doing progressive downloads of Video Marketplace videos
    * Added support for MP3 embedded audio (see video faq for full information)
    * Added support for Mpeg-4 part 2 video files in AVI containers
    * Added support for Right Shoulder button on controller to chapter skip forward
    * Added support for Right Trigger button on controller to fast forward
    * Added support for Zune Podcast video playback from Zune device
    * Added support to display metadata and thumbnails embedded in video files
    * Added support to enumerate .divx video files
    * Added support to group TV shows by Series in Video Library of Media Blade
    * Added support to group Video and Game Trailers into same area of Video Library of Media Blade
    * Added support to sort Movies or TV Shows by Title or Download date in Video Library of Media Blade
    * Added top level support to show expired or soon to expire information for purchased movies from Video Marketplace in Media Blade
    * Improve support for "Play Now" calculations with ISP that boost download for the first 20MB of a file
    * Improved accuracy of bookmark positions when video player abnormally ends
    * Improved accuracy of download progress bar after chapter skipping operations
    * Improved auto resizing experience for small (under 100x100) video files
    * Improved Bookmark / Resume experience with 60fps Interlaced WMV videos
    * Improved bookmark support while progressively downloading videos from Marketplace
    * Improved calculations for "Play Now" for Video Marketplace downloads
    * Improved deinterlacer support for video playback
    * Improved enumeration speed for user-generated video content in Media Blade
    * Improved error message support when playing back video files without valid licenses
    * Improved error message support when pulling USB drive while playing back video files
    * Improved handling for USB memory stick removal while on Video device selection list in Media blade
    * Improved handling of video playback when transitioning from 4x FF to Play with MP4 video files
    * Improved handling of WMV bookmarks when rewinding and shutting down video player
    * Improved info pane timer when playing back DRM's WMV content from Windows Media Player 11 from Windows PC
    * Improved message support for progressive video playback
    * Improved overall UI, content descriptions and navigation of Video Library of Media Blade
    * Improved performance during Fast Forward to Playback transition when playing back MP4 content
    * Improved performance for buffering and playback of streaming videos from Xbox LIVE
    * Improved performance for low bandwidth streaming of MP4 videos from Zune PC software v1.0
    * Improved performance of skip forward/backward with WMV video files
    * Improved performance of trick modes when streaming videos from Zune PC client
    * Improved performance of WMV playback for WMV7 & WMV8 encoded video files
    * Improved playback experience after extended pauses of video files from Marketplace
    * Improved playback experience when resuming from a stopped/paused state
    * Improved playback performance for h264 720p .MOV files
    * Improved playback performance with 1920x1080 MP4 files
    * Improved playback performance with 5Mb h264 encoded video files
    * Improved playback performance with 60fps 720x480 MP4 content
    * Improved playback performance with h264 files in .m4v containers
    * Improved quality for upscaled user videos when played back full screen
    * Improved quality of MP4 decoder: Global Motion Compensation and VMX optimizations
    * Improved quality of MP4 decoder: improved Interlaced Support
    * Improved quality of MP4 decoder: Out of order frame output, bidirectional motion vector handling, etc.
    * Improved quality with  non-square pixel video files
    * Improved responsiveness of trick mode controls for video playback
    * Improved robustness during chapter skipping of h264 video files
    * Improved robustness for streaming problematic video files from Zune PC Software 1.0 or Windows Media Player 11
    * Improved robustness of video player when playback catches up to downloads in progressive playback scenarios
    * Improved robustness of video streaming when network congestion / stalls occur
    * Improved robustness when closing video player after attempting to play a video file that would not open
    * Improved robustness when entering and exiting video playback on a portable device repeatedly
    * Improved robustness when exiting video files encoded in h264 and playing back from attached USB HDD
    * Improved robustness when playing back Mp4 video with consecutive bad aac samples encoded into it
    * Improved robustness when shutting down console during h264 video playback
    * Improved robustness when trying to play a video recently moved from MU to HDD or vice versa
    * Improved robustness with video player when exiting player via Xbox Guide button -> Y
    * Improved support for AAC-LC 2 channel encoded audio in MP4 video files
    * Improved support for chapter skipping during progressive downloads of Marketplace Video content
    * Improved support for MP4 video files with discontinuous time stamps encoded in
    * Improved support for MP4 video playback from burned optical dvd-r's
    * Improved support for resuming downloaded videos after reaching end of an uncompleted download
    * Improved support for resuming partially downloaded videos from Marketplace
    * Improved support for using Big Button controller during video playback
    * Improved support for Video bookmarks when playing MP4 videos from USB portable hard drives
    * Improved sync of video display and info pane display when rewinding
    * Improved text for Windows Media Center setup instructions
    * Improved Trick mode support when streaming videos with AAC embedded audio
    * Improved video performance for 60fps interlaced WMV videos
    * Improved Video performance with 15Mbs 1080i 24fps WMV video files
    * Improved video playback for Fast-forward and immediate exit usage with h264 video files
    * Improved video playback of MP4 content from Zune PC Software v1.0
    * Improved video playback when source content has incorrect sync samples encoded
    * Improved video quality for SD Composite AV pack displays of the on-screen display for video controls
    * Improved video support for chapter skipping of MP4 videos
    * Improved Videotrick mode support with 24fps 1080i WMV video files
    * Improved visual display of WMV video files while rewinding
    * Improved WMV Playback performance for 60fps and 1080i 30fps videos
    * Improved WMV7 performance with VLC encoded content
    * Removed occasional purple flickers in video playback when transitioning between FF and RW
    * Removed potential 9 second delay when rewinding WMV video files
System
    * Added fade out transition when powering down console
    * Added support for browsing XNA games within the Games blade
    * Added support for video playback from UDFS formatted USB devices
    * Added support for XNA Game Studio Express V.2
    * Added support to connect to Apple Extreme routers in 802.11a/n mode
    * Added support to pause background downloads when streaming full screen videos or ads
    * Added support to retrieve game thumbnail directly from XNA game package
    * Added system wide support for Simplified Chinese language
    * Added text to explain flashing LED in the Ring of Light during background download low power mode
    * Addressed rare case where game disc would spin in the DVD drive while playing HD-DVD Movie in external HD-DVD drive
    * Disable Optical audio output when in low power background download mode
    * DVD player no longer converts to YCbCr709 when output is over HDMI
    * Improved auto sign-in to Xbox LIVE with Xbox 360 Wireless Adapter
    * Improved clock accuracy for S/PDIF optical streams
    * Improved compatibility with NEC WR8400N WiFi routers
    * Improved download speeds when in low power background download mode
    * Improved DVD Tray State notifications immediately after application of System Update
    * Improved Forced Aspect Ratio Changes via HDMI output (including DVI)
    * Improved handling when ejecting game disc during game start
    * Improved handling when removing MU after sending Arcade game recommendation to friend
    * Improved localization text for Wifi setup in German
    * Improved performance for Game Titles to reboot in backcompat scenarios
    * Improved performance of Xbox Guide during Messenger signin
    * Improved robustness when ejecting game disc when prompted for game title update
    * Improved robustness when inserting two MU's at the same time on the device selector scene
    * Improved support for 3rd Party Controllers
    * Improved support for Buffalo WiFi routers
    * Improved support for Creston AV receivers with HDMI
    * Improved support for JPN Corega CG-BARFX network router
    * Improved support for signing into Xbox LIVE with Big Button Controller
    * Improved support for starting console with Big Button Controller when console is charging attached Wireless Controllers
    * Improved Xbox guide performance ~2x
    * Removed "Windows-based PC" from Computers area in Systems blade
    * Removed option to "Turn off Controller" when using Big Button Controller
    * Resync the Ring of Light pattern to the boot audio/animation
    * Updated copyright dates for 2007
source: 
Xbox.com
Video Playback Faq
Xbox 360 Fall Dashboard Update Walkthrough (Youtube)