I have a Kinect for my Xbox 360 that we bought at Christmas for the kids to play. The problem was apparent right away. To get back far enough for the Kinect to read your motions, we were right on top of the couch. Without rearranging things in the room, the Kinect was useless. I am sure that there are many people that have the same issues out there.
If you want to use your Kinect in a smaller space, what you need is the new Zoom Play Range Reduction Lens for Kinect from Nyko. This is a slip on lens contraption for your Kinect that allows you to play 40% closer to the TV and still have accurate tracking with the Kinect. That is perfect and will let me stand in roughly the center of the room when I play the Kinect with my kids.
There is no software needed and Nyko claims that you don’t have to adjust the device to use it. The Zoom clips to the Kinect to stay in place when it moves around. You can pick the Zoom up for $29.99(USD) and actually start using the Kinect if your room is too small for the thing right out of the box.