I bought a Kinect, and overall I'd say that yes, it does work.
However, it has some (potentially) strict requirements in order for it to work optimally. You need to stand at least 6 feet away from the sensor, ideally more like 8-10 feet. For two players, 8 feet is the minimum. If you are too close to it, it doesn't work really well at all. Some games might need more room than others, though (I've heard that Your Shape wants you to stand at least 8 feet back, with room behind you in addition, but I haven't played it yet).
The movement in-game does mimic your movements, but there is a very slight lag, and it doesn't always get what you're doing correctly (although it is right most of the time).
Overall, I'm happy with my purchase. I did have to rearrange my gaming setup for it a bit so that I had more room to maneuver, but when set up properly it works really well. If you don't have room for it (or can't make room), then I'd suggest holding off on it. the Kinect Support site has some information on how to set it up, so that might help you determine if it would work for you or not.
Works fine in my projector setup. The projector is on a shelf about 8 feet up, the xbox is below it, and the Kinect is about 10 feet in front of these on a 3 foot stand. The 9 foot diagonal projector screen is above and behind the Kinect sensor. I have no issues other than the absurd $50 price for the powered Kinect USB extension I needed.
Added top-down diagram of room. Remember projector is way, way above the kinect -- 8 feet vs 3 feet.
Best Answer
Kinect is based on the hardware, and possibly software, of PrimeSense. They use a flashing IR light-source and a filtered camera to measure time-in-flight and compute a depth map from that. Presumably, objects that are near-field and/or moving are detected as people, while static and far-away stuff is treated as background.
In contrast, the Wiimote has an IR camera and accelerometers built into it. The sensor bar that you put on/near your TV contains a pair of IR LEDs. The hardware in the Wiimote tracks those LEDs and determines which way it's pointing based on their position.