In April, Microsoft announced that it would be releasing a software upgrade for the Xbox 360 to alleviate playback problems, and generally improve performance, of the HD DVD player.
The update should improve the decoding of audio streams. Previously, certain discs were exhibiting major problems with static popping and clicking obliterating the soundtrack.
DailyTech reports the issue that the HD DVD player can pick up Dolby TrueHD audio, but the Xbox 360 hardware can't handle it, so the quality has to be downgraded:
Instead, the Xbox 360 downsamples the lossless stream into a lossy bitstream that can be outputted via the console’s optical toslink connection. Added in the new software update is a full bitrate 1.5 Mbps DTS and WMA Pro as an option for downmixed audio output, along with the previous 640 kbps Dolby Digital 5.1 option.
Other issues, such as audio/visual synchronisation, are also said to have been fixed, and there's the addition of subtitle, camera angle, and audio buttons that users can toggle from the display button.

From: Battle of Bannockburn educational film to be made in high definition