According to Eurogamer, Kinect 2 will offer far superior motion-sensing and voice recognition.
The improved device will enable games to "lip-read, detect when players are angry, and determine in which direction they are facing".
The technology will reportedly measure players' vocal pitch and volume, as well as facial characteristics, leading to a much more accurate experience.
It was recently suggested that the next Xbox will launch in two editions, one version which is designed primarily for Kinect gaming and video streaming, and another more traditional games console.
Hands-free motion controller Kinect is expected to receive a "significant upgrade" and will be bundled with both systems.
The new Xbox and upgraded Kinect system is expected to be announced formally at CES in January or E3 in June.
Saints Row 4, Alan Wake 2 and other titles are reported to be in development for the system.