An interactive table has a display surface on which a physical object is disposed. A camera within the interactive table responds to infrared (IR) light reflected from the physical object enabling a location of the physical object on the display surface to be determined, so that the physical object appear part of a virtual environment displayed thereon. The physical object can be passive or active. An active object performs an active function, e.g., it can be self-propelled to move about on the display surface, or emit light or sound, or vibrate. The active object can be controlled by a user or the processor. The interactive table can project an image through a physical object on the display surface so the image appears part of the object. A virtual entity is preferably displayed at a position (and a size) to avoid visually interference with any physical object on the display surface.