You people (as usual) aren't really thinking about this enough. I don't even have an Xbox, and I can see that Natal would be a great idea for a game like this. You wouldn't have to walk on spot the entire time as I'm pretty certain that would be a stupid idea to implement, but the idea of being able to draw your weapons and use them 'realistically' or fling spells would be fantastic.
The NPC interaction demonstrated would be good as well, since the NPCs would remember you more than just on what your last selected speech option was, and interaction would be so much more immersive than before.