Project Natal is said to be the result of microsoft buying several smaller companies that had all developed some form of motion sensetive technology. Below are a few videos of companies demonstrating technology that has now been purchased by Microsoft (allegedly, I cannot confirm this), this may give you a further idea of the possibilities of Project Natal.

Short Fighting Video from CES 2008
This video shows a camera which can perceive depth, with the technology being applied to a boxing game.

3DVSystems  Zcam
This video shows windows vista being manipulated purely by the physical movements of the person behind the screen.

3DV Systems Zcam, again
3DV shows of their Zcam at CES 2008, this time the demo is of a woman hitting a virtual punching bag. Below it is a demo of the same technology being applied to a boxing game (starting to lookl like there will be a crowded market for fighting games, ey?).

3DV Zcam, yet again..
Ok, yet another Zcam video but this shows off a rather cool flight simulator developed for Zcam.