Check out the video above from Microsoft Research. It uses the Microsoft Kinect and a panning projector to take game objects and project them into your room. They call it the Beamatron, but you'll call it cool.
The Kinect basically creates a 3D model of the room, and tells the projector how to distort the image of the in-game object, and how the object should react to real-world scenery. In the video example, a projected car bumps into "walls" in its environment, and tumbles over a ramp. Neat!