The picture looks a little weird—the Xbox and sensor bar do seem a bit Photoshoppy to us—but it definitely sounds intriguing. The sensor bar supposedly has a built-in camera and mic, though Engadget's tipster has "no idea" how it works.
The deal is that you'd have full-body and hand gesture controls—it'll pick up "small gestures" like pinching and grabbing on top of punching and kicking—more video conferencing in games, and you can "move" objects. I kind of hope you won't control fighting games by actually fighting, 'cause then I'd never pull off a piledriver with Zangief in Street Fighter IV. Yes, it does sound like a more evolved version of the PS Eye in some ways.
The whole thing seems a bit too advanced to be true, but maybe Microsoft really has cracked the key to perfect motion controls. E3's in June, so the mystery won't stay one for long. Update: Actually, Microsoft gave us a clue at Techfest in February showing off "writing in the air" with an Xbox logo that makes this seem more likely: [Engadget]