The Kinect's combination of hardware and software allows it to do some pretty incredible things. The video sensors basically spit out thousands of little light dots to measure distance and movement, and thanks to the analysis software, are able to do some incredibly impressive things. Just try out Your Shape: Fitness Evolved--the game tracks your tiniest movement with near-total precision. Unfortunately, the audio side of things has proved harder to take advantage of, largely because it's Microsoft's software that makes the Kinect able to filter out ambient noise, distinguish between speakers, and adjust volume so you never have to yell. But surely that will come--the Kinect has only been available for two weeks, remember.
Still, the Kinect is a limited device at the moment. You can play the few Kinect-specific games that are available and control a few parts of the Xbox experience, but most of the Kinect launch games are underwhelming, and Kinect can't be used to control the vast majority of the Xbox dashboard. Netflix, especially, is begging for it--just imagine being able to say "Xbox! Play 30 Rock, season two, episode seven, on Netflix," or swipe through seasons with a wave of the hand. That kind of control is totally possible, but hasn't been implemented yet.
Luckily, Microsoft's plans for Kinect, as well as Kinect's processing software, won't stop at just a few video games. Kotaku explored some of the things Microsoft's got in store, which include implementation in other devices entirely (computers, tablets, smartphones, cars), controlling live television, and all kinds of other stuff. But since nobody wants to wait for Microsoft to roll out these new applications, hackers have stepped up to see what can be done with Kinect right now. (And don't worry--it's been hacked to work with Mac OS X, too.)