Microsoft has been trying to counter any perceived advantage that the PS3 might have over the Xbox 360. In addition to the upcoming HD-DVD drive for high def movie watching, they recently announced that a free update will allow the 360 to output a 1080p HD signal, which was something the PS3 had that the 360 didn't. Now if the Xbox gets an HMDI cable to output a digital signal (that also supports next gen audio), the console race will be even closer.
However, they could really put some distance between the 360 and the PS3 by focusing on one word: HALO. There are people that will buy a 360 just to play the third game. And now with Halo Wars coming, as well as the fourth entry in the Halo series being developed by Peter Jackson himself, I'm glad I have a 360.