We'll have to wait well over a year to see if this rumors pans out, but sources in Singapore, which support an earlier Mercury News report, say that Microsoft's manufacturing partners are already readying 45nm (nano meter) Xbox 360 CPUs. Right now, 65nm CPUs are found in the Xbox 360. Once Microsoft is able to shrink the size of the CPU enough, it can redesign the system all it wants. We've already seen what Microsoft originally has in mind for the 360, so I'm curious to see what Redmond can come up with. I'm all about the PS2 redesign, the PSTWO, the only system I actually own.
As with all rumors, Microsoft refuses to comment, one or the other, on this one's veracity. We can speculate that, should Microsoft go through with the transition to 45nm CPUs—it just switched from 90nm to 65nm in the past few months—it'll be sometime in 2008 or 2009 before we see any redesigns. By then, the 360 will be at least three or four years old, meaning we'll be starting to hear about the next generation Xbox.
Microsoft Readying Redesigned 360? [Next Gen]