Stryker,
As onlysublime stated, the resolution of the camera is a limitation. Lights are amazingly important, I've noticed a serious drop-off in quality once the lights get below super bright. Unfortunately as amped up as Kinect Chat is, the quality doesn't come close to Skype a HD cam on your PC.
I tried using Kinect Chat for quite some time, since I have family on the East Coast, and we thought it'd be great to have larger discussions (having 20 people trying to take turns squeezing infront of a webcam on our laptops has always been problematic), but the Kinect video and audio quality just didn't cut it.
Good luck, it can be used, just don't expect to have a high quality experience. When I first heard of Avatar Kinect, I wondered if they had built that as a partial answer to the low quality video feed.
-JR