That is freakishly awesome.
Also, a better resolution of the same video :http://research.microsoft.com/apps/video/default.aspx?id=179795
There's also the short form from the CES video: http://research.microsoft.com/apps/video/default.aspx?id=179806
Note: According to the MSR website, these videos don't have any post-processing added. The kinect is also used to get a layout of the room to automagically adjust the light for the fact that your room isn't flat.
If they can get this somehow into the XBox 720, they'll utterly destroy the competition.