The add-on will be compatible with all past, present and future versions of the Xbox 360 and combines an RGB camera, depth sensor, multi-array microphone and custom processor in one compact device designed to sit on or below a TV, just like the Wii’s sensor bar. Microsoft says this combination of features allows the Project Natal sensor to track full body movement in 3-D, while responding to voice commands, directions and even a shift of emotion in your voice.

Microsoft has sent prototypes to all the main game developers and was able to demo a Breakout-like game called Ricochet and a paint program called Paint Party at E3. Also on show was an in game avatar created by Fable designer Peter Molyneux. The avatar interacted with the player by looking in his or her direction, responding to live conversation, and even accepting hand-drawn messages scanned into the game.

Microsoft claims the sensor is not light-dependent, can recognize you just by looking at you, and doesn’t just react to key words but understands what you’re saying.

Steven Spielberg even made an appearance to talk up the potential of the device in offering a more immersive gaming experience and to announce that he was working on games utilizing the technology.

The Wii’s motion sensitive controller is credited with opening up the gaming audience to include those that had previously shunned video games. Even without the processing power or HD graphical beauty of the Xbox 360 or PS3, the Wii has been able to claim top spot in the current generation (non-handheld) console war thanks largely to the appeal of its motion sensitive controller to new and casual gamers. so it’s not surprising to see Microsoft seeking to counter slowing Xbox 360 sales by making a play for a bigger slice of the casual gaming crowd.

There’s no doubt the Project Natal announcement has got people excited. You just have to check out the video below and get an idea of what is possible to understand why. but all this excitement comes before any details on price, date or even an official name for the device have been provided. The key question of accuracy also remains unanswered. Nintendo and Sony are sticking with a physical controller for their upcoming Wii MotionPlus and Playstation Motion Controllers respectively. both apparently offer impressive accuracy, so Microsoft will have to ensure their device can cut the mustard accuracy-wise to live up to its promise.