[UPDATE: Video of Milo is now after the jump.]

Minutes ago, Microsoft concluded its annual E3 keynote presentation, an event filled with old game ideas: killing, driving, killing, Final Fantasy, Rock Band Beatles, and on and on and yawn. But after the sequel party ran its course, Microsoft unveiled something different: Project Natal, the full-body motion control camera system for Xbox 360.

Game makers have tried doing motion-sensitive camera games, where a dinky webcam captures your body, then converts its silhouette into a game character, swiping at enemies and whatnot. But those are clumsy and inaccurate. In theory, Natal will take that concept a step further, using its cameras and sensors to turn you into a virtual wireframe skeleton that can accurately steer a car, dribble a soccer ball, or, of course, punch a dude in the face, all with nothing more than your body as the controller.

It also has a microphone for speech commands and doubles as a webcam complete with Minority Report-style waves of hands in the air to flip through menus and send photos to friends. But is this thing for real? Hard to tell 100%; most of the introduction was with concepts, not real games, and one of the three actual demos was a spastic, imprecise and confusing-looking dodgeball sim.

More interesting was the painting prototype in which a guy waved his hands toward the screen to aim splotches of color, Pollack-style, at an on-screen canvas. He pulled off his painting quickly and precisely. After that, MS debuted a creepy project that looked straight out of A.I.: Milo, the "My Buddy" of video games, made by Fable creator Peter Molyneux.

"He can recognize our faces, our voices, and our emotions in us," Molyneux said as a woman had a goddamned conversation with a 9-year-old synth-boy. He recognized key phrases, then repeated them back to carry on conversation, and he'd mope and turn his head down when the tester mentioned things she knew he was uncomfortable with, like homework. (Molyneux gushed that the tester knew what Milo disliked and was building "a relationship" with the psuedo-child.) In the demo, Milo eventually babbled about his inability to draw a fish for his homework assignment.

The tester grabbed a piece of paper and drew a simple fish. She then held it up to the TV screen, and Milo grabbed the paper, recognized its fish shape, and thanked her. Wow. On Xbox Live, this is a huge step up from the usual interactions with idiot, racist teens (though lord knows how poor, little Milo would react to having one of them hand him a drawing of a penis).

No release dates, no prices, no games announced. But the Natal demos were convincing enough for now. I can't imagine any game makers topping this for the rest of the week's E3 games conference.