Contrary to popular belief, Microsoft does do a lot of cool innovative stuff and I've heard they have a great R&D department. I guess I missed this while getting ready for CES, but here's a look at a project called IllumiRoom
What it does is project various aspects from the game all around the room. It could be effects from a weapon or even a bigger view of the area. Using a projector, it supplements what you see on the screen with whatever the developers program into. I can also imagine HUD like displays that are projected on either side of your TV when you play a game.
The video isn't done with special effects as everything you see is happening in real time. It's a proof of concept and everything you see is truly happening. Will this be a feature of the next Xbox console? Who knows, but if it does come out, I can imagine a lot of folks re-arranging their room around to get a better experience out of this.