Ghetto finger-tracking (that works!) using a wiimote controller, IR LED array, and reflective tape:
[youtube]http://www.youtube.com/watch?v=0awjPUkBXOU[/youtube]

Taking it a step further, add a video projector & IR LED equipped pen, and you have a wall sized multi-touch interactive display:
[youtube]http://www.youtube.com/watch?v=5s5EvhHy7eQ[/youtube]

As the guy says, it’s impractical – waving your arm around like this leads to something called Gorilla Arm in the industry, and is why you don’t see many touch sensitive computer screens. It’s also why Microsoft’s Surface is a horizontal display.

Details (and source code) available at Johnny Chung Lee’s site.