I don't know why we need facial recognition technology for the PlayStation Eye, but it works, and Sony recently showed it off in Japan at the CESA Developers Conference.
Boiling down the tech term-heavy report on Gamasutra, it seems that the PlayStation Eye's recongnition powers can match and compare photos, and then do the same things for faces. For facial recognition, the PS Eye would be able to detect things like age and nationality, but even the direction and orientation of a face in the frame.
How will they use this tech? Avatar-linked facial recognition was shown off at the conference. According to the report, faces are tracked in a way that if the user smiles, the avatar would change to reflect that, smiling back. Also, a mini-game called Smile Competition was shown. It would score players on their smiles -- best smile wins.
Interesting, Sony. But you're going to have to pull out something cooler than a smile competition game when you show this off to the gaming world.