Portals, a project by a grad student at Art Center College of Design in LA, lets you stick your hand into a display and directly manipulate a virtual world. It's not really virtual reality, and it's not really augmented reality. I'm not sure what reality to call it (a parallel reality, maybe), but the potential here is crazy.
The hardware that runs each Portal box is simple: there's a display, a green screen, and a webcam. When you stick your hand in the box, the webcam captures your hand against the green screen and then throws that onto the display at the front that you're looking at. The background can be anything at all, although the designer of this project has been using Google Streetview so that you can pretend to be a GIANT HAND MONSTER.
There's also an interactive aspect to Portal, since you can take other objects into the box with you, and the system will (eventually) recognize them and make them part of the scene using a touch surface and RFID tags. And since the scene is completely virtual (even though your hand is in there), you can hook two or more Portal boxes together remotely for some multiplayer hand-action.
The designer of this project, Jayne Vidheecharoen, is mostly concerned with getting two Portal prototypes up and running in time to finish her thesis, so it's not going to get turned into anything that you can buy quite yet. Even so, it's fun to imagine what might be possible with displays that you could stick your hand into to manipulate what's inside. Ew, I just knew that's the first place your mind was going to go, you sick little monkey you.
We've got a video for you that shows the Portal box in action, below. It's from Kickstarter, but the funding period is over (with 190% funding) so you can watch it without feeling guilty.