Capacitive sensor

http://playground.arduino.cc//Main/CapacitiveSensor?from=Main.CapSense

I was reading this and I think I have my head around how it works.

However what would I need to turn the RC oscillator into a steady digital or analog voltage before it gets to the arduino.

A DAC or and ADC?

How complicated would it be to create a crude DAC or ADC out of discrete components?

What you're really doing is measuring the capacitance. I expect that could be done with a pulse generator that charged/discharged the capacitor through resistors, and an ADC circuit that triggered at a threshold voltage. Maybe you could design a 555 circuit that would do that. You might need two 555s.