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Xbox 360 is all set to receive a total software overhaul come fall and Microsoft has announced that the changes will include an entirely 3D slide interface for the main Dashboard screen as well as fancy new Mii-like 3D Avatars, a new emphasis on community with IM, video chat, and photo sharing. Other features will allow users to create a “Live party” and invite as many as 8 of your friends to hang out in the 3D.

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Avatars will be integrated into the GamerCard, which can be used in Live Arcade games like Uno, and even in third party titles such as the upcoming Scene It? game.
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This bold new initiative will certainly up the ante for the competition and I guess only time will tell if Sony and Wii can keep up with MS.
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Source: Engadget