The obvious answer is to make it shorter rather than thinner. It can still be as wide as a HDD, but can be half as tall and half as deep (basically the size of a thick DVD drive).

Why would MS make a slim 360, the best thing MS can do is keep making it cheaper. The PS3 will take years to hit a relistic price due to blu-ray and all the stuff you don't need. Just imagine a 360 at $100. It would sell even more. Also why waste money on trying to make it smaller when it can go on more exclusives and taking PS3 exclusives like MGS4, FF, GTA etc. That were MS should keep doing. Killing of the PS3 is what they want and by the looks of it they are doing a good job.

If it is smaller it will take less resources to make and therefore be cheaper.  If they can integrate the CPU and GPU on a single chip like the PS2 slim then it can be done.  But if it costs 100's of millions in R&D then it might be better used somewhere else.  I would buy another 360 if they had a slim model and use my current one on another TV.