If you accept the agreement for Microsoft's new Kinect system they can record the audio and video anytime they want.
If you accept the agreement, you “expressly authorize and consent to us accessing or disclosing information about you, including the content of your communications, in order to: (a) comply with the law or respond to lawful requests or legal process; (b) protect the rights or property of Microsoft, our partners, or our customers, including the enforcement of our agreements or policies governing your use of the Service; or (c) act on a good faith belief that such access or disclosure is necessary to protect the personal safety of Microsoft employees, customers, or the public.
“You should not expect any level of privacy concerning your use of the live communication features (for example, voice chat, video and communications in live-hosted gameplay sessions) offered through the Service.” They obviously won’t – and can’t – monitor every single system at the same time, but they say that they have the right to do so “to the maximum extent permitted by law.”
Microsoft also “reserves the right at all times to disclose any information as necessary to satisfy any applicable law, regulation, legal process or governmental request, or to edit, refuse to post or to remove any information or materials, in whole or in part, in Microsoft’s sole discretion.” Break the law in front of your Kinect system? You could be up against the law.