Speaking to Joystiq recently, Microsoft has confirmed that the Kinect hardware is certainly capable of recognising a seated player; it's the software that is the potentially limiting factor. "Kinect can be used while sitting when an experience is developed with sitting in mind," said a Microsoft representative to Joystiq.
Reports flooded in from E3 that those demonstrating various Kinect titles instructed users that they must stand upright in order for the technology to work. Microsoft insists that this is simply an area of confusion, and that many applications are in development for Kinect with a seated user in mind. Microsoft highlighted such uses of Kinect as dashboard navigation and the Zune video service as examples of "experiences where we expect people to be sitting".
That said, Microsoft added that, for a peripheral such as this, it was "natural for Kinect games to be designed to get you off the couch: dancing, running, dodging, bending and kicking".