Well, outside of the obvious general improvements in CPU technology (believe it or not, as time goes on we as a soceity get BETTER at doing things!), the X360 also uses different cooling methods. Could have swore I heard something about a liquid cooling system, though I'm not totally sure.But its not that much smaller than the original Xbox. You would think three cores running at 3.2Ghz would require more space than that, if its running SO HOT.
Regardless, heat sinks, fans, etc., have come a long ways from five years ago when the first Xbox released.