I saw the video your talking about and by the sounds of it, the controler had to be aimed at the sensor. That Geoff guy said he was 6 ft 3 and had to hold the controler at his waist for it to reconise any movment at all..which is a little worrying.
You can kind of see in the picture how its set up.
This is the video, the first 10 minutes they talk about it:http://uk.gamespot.com/e3/e3live.html Its the seond video down called 'Spectacular Sci-Fi'