Facial expressions are mimicked by your Avatar through Avatar Kinect and Microsoft pledge this is "just the beginning" of what the technology will offer.
July will see Avatar Kinect added to the Fun Lab suite for Kinect. It was expected to arrive last month as part of the spring dashboard update but failed to materialise. Microsoft unveiled Kinect Fun Labs during their E3 2011 conference on Monday.
Other techs shown were able to scan in objects and have them digitised as well as have a 'true' avatar created of yourself by taking certain angled shots of the user.