What Is It? It is essentially a game that lets you create games (rather like Sony's Little Big Planet, but at the same time completely different). It lets you create 3D game worlds with any terrain you want, and then populate that world with items and objects and characters. Anything that you put in the world can be adjusted with custom physics and other instructions to really make a full, complete experience. And the best part? You can do anything and everything with just your controller. No programming skills required here.
Now, it doesn't quite let you make fully custom games (you're limited to the preset character and item choices and you won't be able to do everything you might want) but for $5 it is pretty darn robust. After spending some time with it I'm sure people are going to be able to make some pretty nice things with Kodu, so it is definitely something to keep your eye on.
Check out the official Kodu website here.