A guy known as GIL posted on his blog GIL-O-TOPIA about the internal workings of Kinect.
If put in simple terms the Kinect basically contains a VGA camera, an IR camera, an IR projector, a motor, 4 mics and a fan and some control chips. The cameras are structured light cameras and provide distance measurements for each pixel in space. These parts make it possible for the Kinect to register every movement of every part of the body of the person standing in front of it. It sends this data over USB.
However, the real magic of Kinect lies in how all that data is interpreted and used by applications. The software uses exceptionally complex algorithms which Microsoft has perfected for the Xbox 360 console and that the openKinect community is trying to do now for the computer.
This is what Johnny Lee Chung (creator of Wiimote project) had to say about the software used in Kinect…“The sophistication and performance of the algorithms rival or exceed anything that I’ve seen in academic research, never mind a consumer product.We would all love to one day have our own personal holodeck. This is a pretty measurable step in that direction.”
The whole elaborated version is available on the GIL-O-TOPIA blog here