Project Aura, a project at Carnegie Mellon University’s Entertainment Technology Center sponsored by Microsoft. Aura is an avatar-rich app offering meaningful personal expression across Microsoft devices. With Aura, users will experience a more human approach to the actions, information, whereabouts, and statuses of their many friends and followers. There is no mention of integration of Project Aura into Windows Phone 7, but I guess it will find its home at Xbox Live.
Watch below the video on the application itself showing how you can customize your avatar, its expressions,etc,.
More videos after the break.