A controller is needed for precision, and also for not looking really dumb waving your arms like a maniac like the Natal demo lady did. Several games just wouldn't work without a controller.
That is what I see as the main flaw with Natal, as the game gets more complex the lack of a button to press or some tangible feedback will frustrate most players relegating the tech to just Wii like family games.
An example would be a Resident Evil game, imagine all the things you would have to do to handle a game like that without a controller. How do you walk, turn, shoot, change weapons, reload, strike with a knife, pick up stuff, climb ladders, select and item from your bag, etc, etc. Sure most things can be programed and some others set into voice recognition but what if in a critical moment voice recognition goes wonky?, what if you want to shoot but angle your arm a little lower and walk forward intead?.
Games like those are going to be really, really difficult to program, this is why I expect MS to take the PS3 route also and release a motion controller after their product goes on sale, as much as people love to hate Sony they get some ideas correctly even if their execution takes a little time to really shine.