Our friends at Joystiq found this one -- it's a jailbroken iPhone hooked up to a picoprojector, with the software using the compass and the accelerometer to determine exactly where the projector is aimed. That brings in a fun augmented reality touch -- you can move the iPhone around real space to determine where a turret is pointed in the virtual one. It's a little harder to explain than to show, but the hardware in the iPhone tells the projector what you're looking at, so moving the iPhone moves the view.
How do we get from this interesting jailbroken solution to a real game? The iPhone hardware needs an upgrade, and best-case scenario is that it gets a projector built into the iPhone itself. There are already phones that have projectors built in, but as I learned at Macworld when I used this projector, the limiter isn't the projector hardware; it's the battery. The power source was as big as the iPhone itself, and even then only lasted about the length of a movie. So it'll be a while, probably, before Apple is convinced to include a projector in the phone, and then delivers hardware that can actually keep it sleek and streamlined.
Until then, this demo makes the old gears go about what's possible with a setup like this. Very cool.