The device features an RGB camera, depth sensor, and a microphone (though Microsoft has said that audio interactivity will not be available right away). All of these combined will allow the Kinect to have full body 3D motion tracking capabilites -- making for some potentially interesting gameplay. It will also be able to recognize your face and voice, hopefully helping to personalize the experience.
This is a very intriguing development in the world of virtual reality -- even though we have seen other motion controllers that take us further and further out of our world and into another, they all require a physical controller that could potentially distract from the game itself. On the other hand, Kinect does lack a ton of control input potential.