Yahoo: Microsoft unveiled "Project Natal" (pronounced "nuh-tall"), a code name for a new way of game control combining RGB camera, depth sensor, multi-array microphone and custom processor running proprietary software all in one device. Unlike 2-D cameras and controllers, "Project Natal" tracks your full body movement in 3-D, while responding to commands, directions and even a shift of emotion in your voice.
Worth Playing says that the depth sensor has an infrared projector combined with a monochrome CMOS sensor allowing "Project Natal" to see the room in 3-D under any lighting conditions.
Update: Here is Microsoft video on how it works:
Update #2: Microsoft Corporate VP for Strategy and Business Development talks about Project Natal details in interview to Venture Beat. The product is planned to hit the market on spring 2010.





