Most notable, the update includes the option to add your PayPal account as a billing option on the console (it was previously limited to Xbox.com) for Microsoft Points and Marketplace content purchases. The feature will be available to all Xbox Live users, excluding those in Brazil, Chile, Colombia, Czech Republic, Finland, Greece, Hungary, India, Japan, Russia, South Africa, South Korea and Taiwan. So ... just a few (million) people left out.
Additionally, the new system update adds and enables (by default) an auto-standby feature that's activated after one hour of console inactivity. You can switch it off in System Settings, but ... why? Finally, the update will also introduce support for the new Xbox game disc format (a.k.a. "XGD3"), which adds 1GB of storage capacity and some fresh anti-piracy coating.
According to internal documents we obtained earlier this month, Avatar Kinect is scheduled to be released as a separate update on May 27.