Kudo Tsunoda, The periph's creator came on stage to show off some of the device's features -- your camera will apparently recognize you and automatically log you into Xbox Live. Your avatar will mimic your movements. From there, you can control the dashboard by moving your hands left or right (Minority Report style).
He then showed off a prototype game called Ricochet, a 3D Breakout-esque game. A woman demoed the game, moving her body to knock a ball into targets. As one would assume, the woman performing the demo looks completely ridiculous.
The next demo was Paint Party, a painting application. A man who demoed the title flung paint onto a canvas by flinging his arms in front of the Natal, creating a lovely scenic view. The man changed his tool, and began to make more precise strokes, painting the leaves of a tree. Now he's showing his sillouhette on the canvas -- it's capturing his outline perfectly, even without a pristine white background usually needed for this type of technology to work effectively.
The device will also have voice recognition technology. Microsoft partners are receiving Natal today.