In an interview with USA Today, Microsoft Chief Research and Strategy Officer Craig Mundie showed off one of the technologies he's been cooking up in his units skunk works operation.

It looks like you; its face contorts like yours into smiles, laughs, and grimaces.  It even talks like you.  The digital entity in question is what may become Microsoft's next generation avatar for its Xbox Live gaming network.  While the photo-realism may be a turn off for some people, it could offer some stunning personalized gameplay.

Mr. Mundie hopes to eventually expand the Avatar into a full body photorealistic representation that can be placed as an in-game model.

Reportedly the new floating-head avatar project was inspired by the increasing popularity and interest in the $149 Xbox Kinect, an accessory for the Xbox 360 that captures video and audio.  Using an array of microphones the device pinpoints sounds.  Similarly, using a high-quality RGB camera and a depth sensor the Kinect is able to spot user’s location and body position.

An inspired Microsoft is dreaming up all kinds of uses for Kinect and its next generation successor.  Microsoft researchers in Oxford, England, for example showed of a program that could use Kinect to create a 3D model of your home's interior, which you could offer free tours in.  The software also allows you to place 3D furniture models in your home to see how they would look.  That would be boon to interior decorators and homeowners alike.

In its current form Kinect offers plenty of perks -- voice commanded movie controls, auto voice/facial recognition Xbox Live network login, and of course a lot of gameplay.  With near term updates like interfacing with Windows Phone 7 handsets, coming later this year Kinect looks to stay a hot item throughout this year.

And with even more impressive technologies like photo-realistic avatars and home decorating applications on the horizon, Microsoft just may be catching a bit of the fire that propelled Nintendo's Wii to international success and fame in the seventh generation of console wars.