I'll reserve judgement until I see this thing in action for real. Although the demo looks very cool.
Ultimately, this is a web cam (maybe 2 for 3D info) and I've seen those logitec web cam games in the past, and they were rather limited. Will the Xbox make good use of the technology?
MSR did show off some pretty cool cam demo in the past, though, so maybe...
But we all railed on the Nintendo & Sony for shoehorning in motion gameplay that don't really add to the enjoyment of the game.
Honestly, I'd hate to play Halo with this thing because that would mean I'd be exhausted by the end of the game.
Who knows, maybe for short, casual games?
There are some demo videos from the company that made the camera:
http://www.3dvsystems.com/gallery/gallery.html It looks like they worked out how to do full-body motion detection similar to the motion capture technology that studios use, except without wearing the body suit.
What is unique about the camera is that it reads a depth component for each pixel in the image, meaning distance from the camera. And it looks like from the Xbox demo video there are two cameras on the device, so they could calculate locations in 3d space.
If you want to do something like, replace the background behind the player's image, its a simple matter of replacing any pixels beyond a certain depth.