The Illumniroom Kinect demo is getting a lot of press but keep in mind that it works by scanning the room from the perspective of the Kinect's location, so if there's two players the best you could hope for is room elimination effects for one of the two players' perspectives.
I can't post links, and I can't remember the site I was on anyways, but one fellow did point out that if you have 120hz 3D, with 2 pairs of "A/B" split-screen mode 3d glasses, and two Kinects attached to helmets worn by both players, and you could also run the projector in 120hz split-frame mode, you could make this effect work for two people, but it'd need a LOT of extra processing power.
So really, for less money/hardware you could just devote a blank wall to a 1080p 120hz projector, and it'd look even better than the demo video.
Plus that's something you could re-use for other things like movies, and your computer, it wouldn't be XBox only?