I put in an AE that hadn't been updated with the new firmware and there are no issue. Clearly the firmware update hoses an older AE so that music cuts out via airplay.
Thanks Apple for another stellar fail!!! What is with Apple these days. One fail after another. When was the last time they issued an update that wasn't riddled with problems?
Don't update your firmware
I'm having the exact same issue with the firmware update, the most annoying part is I'm using all apple products at home (airport extreme, airport express, as well as macs atv2's), how can this issue not have been spotted! I assume it was a turn on test with this firmware release!
Apple something needs to be done about this issue and your testing procedure, this is not the first time an update had screwed up a device, for a company of your stature it's a joke.
Same problem as yours but I've found a way to downgrade the Airport firmware on OSX Mountain Lion. You need to install the Airport Utility 5.6 on wichever OSX version you are (http://support.apple.com/kb/DL1482). Mountain Lion will refuse to install the package. To bypass this, you have to use the shareware Pacifist (http://www.charlessoft.com/) wich will enable the installation of the package.
From Airport Utility 5.6, select "manual configuration" / then click on the word "version" / and finally choose the firmware version 7.6.1 or whichever other previous version you wish. And voilà!
Does not resolve the 7.6.3 issue but at least, it permit to listen to audio without constants cut out. Just have to wait for another upgrade from Apple. But for my part, I'll stay away from them ;-)
Seems that I was wrong with my previous post. You still can downgrade the Airport firmware version with Airport Utility version 6 (OSX. Don't know for Windows). Here's how:
1) Launch Airport Utility version 6
2) Select the Airport you wish to downgrade;
3) Place your cursor over the version number and press ALT
You should being able to select the firmware version you want. Voilà. I've returned to version 7.6.1 and the Airplay audio in now working as expect.