Tech Digest has a little more detail on the upcoming Eye Toy: Kinetic. I saw it at E3 earlier this year, and I'll say I was impressed. There are a couple major improvements over previous Eye Toy titles. In the game, they've set up trigger areas that aren't displayed on screen but help keep the camera calibrated for the user. This means better tracking than before.

The game knows when players are hitting spots close to the boundaries of it's view and can use that information to improve game play. As I understand it, that's done using abilities that are already there for Eye Toy developers, but there's only a finite amount of development time for any game. Earlier Eye Toy games had to use that time becoming familiar with the development platform. I think that Kinetic is benefitting here from just being a more mature software product. Developers on Kinetic had more background in the field.

The other major improvement for game play is the new wide angle or fisheye lens. The lens (called Full Vision Lens or FVL at Tech Digest) allows much more of the player's environment to be seen by the camera. It comes with Kinetic and just snaps on over top the regular Eye Toy lens. The game can get much more interactive with a full view of the room. All the demonstrations that I saw had a very plain off-white backdrop and a large open space. I do have to wonder how this is going to translate to living room play. The games I've played on Eye Toy so far have had issues with light sources in the room and colour variations in the background. I imagine there could be software improvements that tackle these problems as well.
To wrap things up, I thought I'd include the pictures that I took of the Eye Toy: Kinetic demo from E3 2005. I have to say they're still in their original form and the fast motion in low-light makes some of them blurry to boot. Still, you can get an idea of the variety of games available on Kinetic. They've got a few fitness options and a few that are just for fun, Candace described the games in more detail back when we were there.
You can pre-order Eye Toy Kinetic at Amazon.