A few months ago, we caught a glimpse of a project that Microsoft was doing called IllumiRoom. It used a projector to project elements in the wall surrounding your TV to create some pretty cool effects.
Today, Microsoft released a new video showcasing some more things that might be possible with it. The setup has a projector in a coffee table in front of you. The proof of concept product uses a projector in combination with a Kinect to detect a room's setup. It's suppose to sense and conform to any room's setup and that's where the Kinect comes into play in the POC.
Besides the obvious of projecting more game content around the TV, there are some other really cool things that IllumiRoom might make possible. For instance, one of the more interesting ones in my mind is the ability to have a visual indicator of an important object highlighted when outside the field of vision. Another is having weather effects that fall around the TV and actually react to the furniture in the room.
Needless to say, this can be a pretty cool way to experience games if done right. There are limitations, of course and one of those is that you'll probably need a darker room to enjoy the feature fully. It's still a long ways from being a reality, if it ever does become one, but man does this video show off some exciting possibilities.