They say that the clips in this video were recorded as is and are not CGI added after the fact. I sure hope that's true.
IllumiRoom uses a Kinect sensor to map the room you're in and a projector to display the image on the wall, furniture, and whatever else is in front of the gamer. I have not seen it myself, but it is supposed to be able to adapt and display images in real time. I'm told this was shown off at CES, though I didn't hear anything at the time.
When we look at the technical details this isn't that new; rather than being a new type of 3D it's really more of a way to project a large screen image onto irregular surfaces. It still requires a projector like you might find in most conference rooms, only now it seems that IllumiRoom has managed to do away with the large white projector screen. That is a relatively small improvement in absolute terms but it could potentially upset all of gaming.
As I look at the video again, I'd also bet that it will require a fair amount of CPU power. All that extra imagery means a lot of processing power. This might explain why the Xbox 720, or at least the leaked specs which mentioned the Xbox Surface, listed a pair of 6-core CPUs and a custom AMD graphics chip. The IllumiRoom might also be a good project to adapt to Nvidia's new Tegra 4 chip. It has 72 graphic cores and that should be more than enough to pull off IllumiRoom.
In any case, I think this is a pretty cool effect. I'm not that interested in console gaming (KB or nothing), but I would like to see this effect be used to improve the gaming experience of laptops and other not quite-so-huge screens.