Of course it wasn't real (real creepy, maybe), whoever thought that was being pretty naive.
If it can recognize specific tones and map facial expressions, that's good enough to pull off some clever illusions, and good enough for things like hand signals during games.
And it is pretty subtle, there was a hands-on on one of the blogs where the writer tried the burnout paradise mockup, and it was sensitive enough to pick up all the driving pantomime motions.
But, like I wrote on GAF - I heard Todd Howard on ListenUp the other day, and when they asked him about the Xaggle he seemed diplomatic, but you could hear the "Meh" in his voice. I knew then that I'd never get the chance to have a psychotic staredown contest with a Raider (in my imagination the raider awkwardly breaks eye contact after a few seconds and sheepishly hands over all his drugs).

I also knew that about wraps it up for Natal, really. I think a lot of devs are going to feign excitement or interest over both this and the Saggle, but in the end we'll all just be playing kickball, writing our names in the air, and slinging imaginary paint around while wishing we'd saved our money. I've sort of done a 180 in my excitement for these motion controllers. They aren't going to be used, not for anything we're even remotely interested in playing. Maybe next-gen, when MS puts the processors from the Natal unit inside each neXtBox system, and Sony packs in a wand or two with each PS4.
If there are a minimum of three games I'd want to play for each motion system at launch, I'll buy them. Otherwise I'll wait until there are. I suspect I'm going to be waiting several years.