In an interview with Xbox 360 The Official Magazine, Nick Burton, senior programmer at avatar creators Rare, has said that avatars will "become more realistic" and will be considered the 'Avatar 2.0'.
The proportions will be made more realistic because hand-eye co-ordination was problematic when using the old cartoony proportions, this was not due to hardware but rather, player perception.
This is the only information that has been released so far. Expect changes to your avatar around the time of the Kinect's release.
How do you feel about your little person getting a revamp? Would you swap your cartoony character for a realistic representation?