The KidsRoom is a perceptually-based, interactive, narrative playspace for children. Images, music, narration, light, and sound effects are used to transform a normal child's bedroom into a fantasy land where children are guided through a reactive adventure story. The fully-automated system was designed with the following goals: (1) to keep the focus of user action and interaction in the physical, not virtual space; (2) to permit multiple, collaborating people to simultaneously engage in an interactive experience combining both real and virtual objects; (3) to use perceptual, computer-vision algorithms to identify activity in the space without requiring the participants to wear any special clothing or devices; (4) to use narrative to constrain the perceptual recognition, and to use perceptual recognition to allow participants to drive the narrative; (5) to create a truly ``immersive'' and interactive room environment. We believe the KidsRoom is the first multi-person, fully-automated, interactive, narrative environment ever constructed using non-encumbering sensors. This paper describes the KidsRoom, the technology that makes it work, and the issues that were raised during the system's development. Please also see the KidsRoom website.