I thought all the big news sites would have raved about this so I didn't bother posting anything about it, but they haven't, so I will.
If you have a look at the XBox360 Camera Accessory you will notice that it has two cameras in it. This is significant because for years Microsoft Research has been doing research into the stereo vision from two webcams placed on top of the monitor and what can be achieved with this data.
Smart Framing
Sometimes the subject in a webcam image is only small, a person's head for example normally does not fillup the whole picture. So MSR developed smart framing to intelligently zoom and track objects of interest.
( Direct Link AVI )
Gaze Correction
The whole idea of this project was to solve the problem that people never look directly into their webcams. So a 3D model of the person is created and manipulated so that it looks like they are looking directly into the camera and at the person they are talking to.
( Direct Link AVI )
Smart Icons
This is icons painted over the video of the subject. So you could dress yourself in a hat or put other emotions on your webcam video.
( Direct Link AVI )
Background substitution
This is my favourite because it replaces the background of the subject with anything you like. So if you where playing a game of poker in a virtual casino and it was one where you had videos of all your friends playing on the screen at the same time. The backgrounds of all the players could be replaced with backgrounds more fitting of the casino. Thus making the whole experience more atmospheric.
( Direct Link WMV )
GWindows
Is effectively a 3D version of eyeToy used to control windows.
( Direct Link WMV )
Now all this is going to require a lot of multithreaded processing power, so its lucky then that the XBox360 has 3 CPUs.