On the Xbox Team blog Microsoft’s software engineer Shaheen posted an article about the many questions they get concerning the operating system the 360 runs. He says people always think it runs Windows 2000, and he doesn’t know where that misperception comes from. The 360 runs a completely custom operation system built up from the ground. While it still runs a lot of Win32 API’s, not everything is there because all graphics are done through some form of Direct3D.

There are a number of reasons both Xbox and 360 have their own OS. First, it gives Xbox a chance to own its own destiny in terms of architecture. When you have your own operating system, it’s easy to go in and change things. Second comes performance. There isn’t much of a hardware abstraction layer on Xbox - most stuff talks almost directly to hardware. This eliminates a lot of software overhead you might find on a PC. Third is security. With our own operating system, it also becomes a lot easier to design & implement our own security architecture. As the community is finding out, there is a lot of custom stuff.

Like the Windows explorer.exe and user32.dll, the operation system has similarly critical components which are mostly updated when your system console is updated from Xbox Live.