The term "Augmented Reality" is something that I'm sure we'll be hearing a lot more of within the next few years. Augmented reality (AR) is a field of computer research which deals with the combination of real-world and computer-generated data (virtual reality), where computer graphics objects are blended into real footage in real time.

The first application I came across that uses this is GE. This Flash app directs you to print out a piece of paper with a pattern on it, hold it in front of your web cam, and you see a virtual world unfold where the pattern is.

Here is another example on the iPhone via the Augmented Environments Lab blog.

http://www.youtube.com/watch?v=_0bitKDKdg0

Lee Brimelow also has a great video tutorial on creating an AR Flash app with Parervision3D.

This opens up a huge possibliity for interacting with applications and games. Imagine wearing a certian pattern on your shirt while standing in front of your favorite gaming console, which has a camera pointing back at you. But instead of seeing you on the screen, you see the game's character that you are now controlling. Now, I don't know if this technology is there yet, but I can imagine that its not far off.