I was really impressed when i saw this augmented/blended reality project doing the rounds. It mixes a physical substance, sand, as the input for the simulation. Being able to hold and use real things with real physics makes what then happens with the augmentation more immersive and real.

A Kinect is used to determine what is going on in the physical world and mapped with simulation software and calibrated projection to deliver it back into the world. i.e. no looking through a magic lens. It is project and there.
The project homepage has a lot more details about the simulation and also a soon to be released download page.
This isn’t a fake special effect its real and the data input, Sand and a kinect show the power of merging physical and digital and that we don’t just have to rely on keyboards and mice any more 🙂