This cool demonstration by Design I/O, which produces "interactive installations" shows the Kinect being used to project animated hand puppets that respond to the user's movements. Design I/O built it in a day using open-source Kinect drivers.
Kinect's software recognizes not only the X and Y axes of your arm's position but also its Z axis, which means that the puppet could turn and face the viewer, I/O Design notes. You can see it was programmed to recognize hand positions and deliver a squawk when the puppeteer opened the cartoon-bird's beak.
"We can do stuff when another person touches the projection, or is near - i.e. have the birds react, stare, etc," the team notes in comments on the video. "For the simple silhouette isolation you are right, the Kinect just makes it super easy - but for what we have in mind there will be a lot of fun stuff we can add using the device."
As a proof-of-concept built in a single day, not bad at all. And it speaks to the potential for independent development on this new platform.
Interactive Puppet Prototype with Xbox Kinect on Vimeo [I/O Design, thanks TheAznOne]