The system is still in early stages, but Microsoft has sent full functioning prototypes to all big game developers.
Showing off the technology, developer Peter Molyneux said the system could recognize facial expressions as well, determining the mood of the player or players and "reacting accordingly."
Will Natal be successful however? Piers Harding-Rolls, senior analyst with Screen Digest, says it will depending on a number of factors.
"I think the technology looks very interesting but its success depends on the content and how easy it is to use," Rolls added.
"The other aspect is cost and how they will get it out to the user base. That said, I think Microsoft would like to get it out sooner, rather than later."
"Sales of the Xbox 360 hit their peak in 2008 and are now in decline, in terms of console sales, so you would expect them to get it out as soon as possible to rekindle interest in the platform."
Also notably at the show Microsoft announced they had made deals with Twitter and Facebook in an effort to make "full integration between three of the largest social networking sites on the planet." The third being, of course, Xbox Live.
In a move that will certainly rile up both Xbox and PlayStation 3 users alike, legendary developer Hideo Kojima took the stage and announced that a new Metal Gear title would be headed to the Xbox 360, and that he had already started development. The game, "Metal Gear Rising," will mark the first time a Metal Gear Solid title has been developed for a system not created by Sony.
Kojima's own site has now been updated with a new picture of character that resembles Raiden, from Metal Gear Solid 2. You can view it here: Metal Gear Solid Rising