I'm not sure how well Natal can map hand and arm gestures, but assuming it can do it fairly well, I would use Natal to reduce the amount of menus.  Fable on consoles has always struggled with the spell menu.  If you could map a specific arm gesture to spell selection, say something like a radial menu in Mass Effect (ex. an arm gesture upward to select the spell at the top of your radial menu, which might make lightning your active spell.), I think that would be a great use of Natal.

The same could be done for the expression system.  Selecting an expression that is, not acting it out with Natal or anything.

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Windows 7 was my idea!