The accessory is code-named Project Natal. Various mini-games were shown in a demo reel, including a tire-changing game, martial arts fighting, skateboarding, a city-smashing missile-bashing Godzilla-like activity.
Voice commands such as "Play Movie" were also demonstrated.
Using the camera, you'll be able to browse the Xbox 360 interface with mere hand motions, video chat with friends, and "scan" your own objects into games.
Visionary director Steven Spielberg then took the stage, explaining that "I felt like I was present for a historic moment" and that he could then imagine "a new way of personalizing the gameplay experience."
It's not about reinventing the wheel, he added, "it's about no wheel at all." As Steven departed the stage, Microsoft implied he'll be working on games for the device.
With no controller required, players can "move around freely in 3D space," as demonstrated "Ricochet," a mini-game that had player Alice moving back and forth, left and right, punching and kicking on-coming bouncing balls. The company then took a dig at Nintendo, noting that it isn't just a set of "pre-set waggle commands."
A painting activity was shown, with the player literally throwing paint on a canvas with one and both hands while choosing colors with voice commands--"blue," "white," "dark brown," "brown" and so forth. The paint appeared to spurt out of the player's hand with each gesture, much like Spider-Man shooting web.
A stencil filter was then demonstrated, with two players posting to form the shadow of an elephant, and taking the picture with a voice command.
Microsoft further noted that Natal can track multiple people for multiplayer functionality.
No word as to when Natal will arrive, though dev kits are said to be going out today.