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Seece said:

It might mean having a lot of the tech in the 360, and the camera being just a camera, thus much smaller and easier to place.

No. The cameras have virtually nothing to do with the size of Kinect. The microphones determine the width of the device.

Generally, it would be a bad idea to incorporate the hardware into the box. More heat, more em interference, and what about the people who are not interested in Kinect?