During Microsoft's conference at E3 the Natal project was revealed. With this project a peripheral is used to control a game. That peripheral is completely hands free and voice activated.
The Natal basically watches what you do and translates that into the game. The demonstration at E3 showed a woman using her body to smack dodge balls at a wall in order to break it down. The demo also included a look at virtual painting with Natal called Paint Party. A man would yell out colors and then use is body to paint. He could even use his body to create a stencil for the image.
Fun facts about the Natal include its ability to recognize you so it can log you into Xbox Live and it sees you in complete 3D.
One of the most impressive demos of the Natal came from Peter Molyneux and Milo. Milo a boy in your Xbox (one day) recognizes the player, calls her by name, and comments on things she's saying. Milo even took a look at a picture the woman in the demo drew for him.
The demo was quite stunning. When Milo handed the woman goggles she instinctively reached out for them. It was pointed out that the demo wasn't acted and that the woman naturally reached for the goggles because of how engaged she was with Milo. Watch Milo in the tech demo below courtesy of Game Trailers.
Right now the Natal is in development (pre-natal!) and there's no word on when we'll see it at home.
Other coverage:
Joystiq
VG247
Eurogamer
Games Industry