The limitations of the 360's D-pad are well known (and well trolled). This modder's building a D-pad with eight individual switches so that when he hits a diagonal, dammit, he hits a diagonal.
John, the modder, wrote us directly about this. While he acknowledges that sanding down the casing that surrounds the circular pad may improve its response, "you still do not get the accuracy of having eight individual buttons." And rather than build or buy an arcade joystick, he's broken out the solder and set out to make the 360 controller more better all by himself.
I guess building a controller with a D-pad more like Sony's runs afoul of IP infringement somewhere, but that'll never stop modders. John's project stands at $15 in parts, and he's now working on making the top plate/button cover (you see the exposed tact switches there). He says he'll get a step-by-step up on Instructables or his blog once the whole thing is finished, if you have some wires and diodes laying around and don't mind cracking open your own controller.