Just wanted to update some of my thoughts. 
First off I decided I needed to define what cost effective means to me in terms of this project. All the other multi-touch systems that I have seen (excluding the iPhone & iPod Touch) use a projector, webcam and special screen to accomplish their goal. Lets just say a cheap projector is about $800 USD. A webcam is $20. And the special screen (Rosco projection film on an acrylic FTIR pane) is about $150. Rounding up, thats about $1,000 USD... which considering the application thats not a horrible price.
I found some 3mm phototransistors by the company Fairchild for around $0.07 a piece in bulk. The hard part is getting the computer to read the PTs.
My first thought was to daisy chain some 8 channel ADC multiplexers to read all the PTs. I quickly found out that I would need a TON of multiplexers (total # LEDS / 8 or maybe I'm just not using them right). I ended up needing like 1000 some odd multiplexers.
That:
A) is silly
B) will cost to much
and C) will take up a lot of real estate that we don't have.
So, I have shifted my thinking. Rather than using existing multiplex ICs, I'll make my own. The problem, however, is I have no idea how to do that. Ha!
Heres how it works in my head...
The PTs I mentioned earlier (Fairchild QSC113) are 3mm in diameter. Thus, we would make a 110 x 95 array to cover the entire screen with some overlap. Mind you this would require shaving the sides down so that the foot print was literally 3mm².
On a PCB board, the top layer would have 95 rows of copper trace, connecting the emitter of each PT in each row. The bottom layer would have 110 columns of copper trace, connecting to the collector of each PT in each column.
Now this is where I'm not quite sure how this will work...
Basically, each row and column have a switch. The switches need to do 2 things.
First, they need to be controlled by a microprocessor that will turn the switch to an ON or TRUE state.
Second, the switches for each column when in the ON/TRUE state need to connect that column to a power source and the switches for each row to an ADC's input. So that when Column 1's switch is set to ON/TRUE (while the rest are OFF/FALSE) and Row 1's set to ON/TRUE the ADC will get a read out from PT- 1,1 in the matrix.
The microprocessor can then turn on and off switches so that the ADC can essentially scan through the matrix.
The idea is rather simple, I think. Execution on the other hand, I will need some help with.
Can anyone point me in the right direction as to how I might accomplish building a matrix like this, please! 