What are they thinking?

Microsoft realized that they wanted and needed to beat the PS3 to market, so they unveiled the Core and Premium (essentially the same machine, just with different accessories). Meanwhile, the dev kits had HDMI (if I understand those correctly) and in essence were the "real" 360 they probably wanted to release all along - but why throw more money and effort when getting to stores first was the ultimate goal. Heck, most people didn't (and still don't) even have HDTVs, let alone HDMI connections.

Now that the PS3 and Wii are out and have stolen a ton of their thunder, they figure "Hey, we need to compete with the PS3 in terms of hi-def capabilities, so let's throw out the HDMI we've got". That leaves MS and the 360 where it is today.

As far as the smaller chips go, that's just part of technology/making consoles. There's always going to be advances, it's not like they could have waited 2yrs for 65nm chips to become popular then release the 360. I think that move/upgrade is more akin to the PS2 coming out with the "slim" version - it's basically just a tech refresh. The Elite, to me, is more the version they "wanted" to release all along...

I'm not totally sold on MS's ability to make game consoles, the number of defective 360s (especially mine) is definitely troublesome and I'm not in love with the fact that they keep releasing newer versions just a year after mine. But what can you do? The new Civic Si is better than mine, new pc's today are better than mine, etc. That's just the way it goes with disposable products.