Update from Engadget who got to demo the unit. Sounds very promising so far:
The first demo that we played was a 3D breakout game, where the player is trying to bat a red ball (or in the case of this version, sometimes 10 red balls) toward a line of bricks at the end of a long (virtual) space. The body tracking is truly impressive -- according to Kudo, it's picking up 48 joint points on the human body. As soon as we stepped into line in front of the box, the avatar immediately took on our stance and movements. And we mean really took them on -- little gestures with our arms, the posture we had, front and back movements -- it tracked with complete accuracy. We did notice a bit of stutter during some finer movements, but overall the effect was impressive (and more than a little eerie).
Sounds even more promising for the world of martial arts than I expected. Knowing the gaming industry and Microsoft in particular though, the potential for small-time developers to create anything for this is probably minimal at best. It's a good first step for the technology though.