With iTunes 7, Apple updated the iPod firmware to 1.2 for 5th generation iPods. Besides being able to use the games, the integrated Broadcom chipset for video is silently upgraded. The chipset always allowed resolutions up to 640x480 (H.264 and others), but Apple restricted that in the first versions. Now the power is fully usable (it's needed for Apple's new "near DVD-quality" movies from the Music Store.)
If you use the iPod as a playback VCR for your TV, you should re-encode all the movies you might have. Using QuickTime Player Pro 7.1.3, movies are exported for iPod now with H.264 in 640x480. The quality is stunning if you watch it full-size out of iTunes or on your TV (iPod connected with AV-cable). Other software soon might use the new features as well (iSquint, Podner, etc.).
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