Brian mentioned Panda Puppet and Flash Puppet in his blog yesterday and made the excellent point that there's a desperate need for both better software and hardware for digital puppetry systems.
Unfortunately, as Brian also pointed out, almost all of the decent hardware is custom-built and proprietary. Here's a run down of what a few of the better shops in L.A. use:
Jim Henson's Creature Shop - Has the proprietary Henson Digital Performance System, inspired by the Creature Shop's Academy Award winning animatronic controls and probably the most sophisicated system of it's kind in the world. I know a few people who saw a demo of the latest version of it in the fall and they say that it's very, very impressive.
Perform FX - This company - founded by Henson alumni Dave Barclay and Bruce Lanoil - uses a neat little toy called the PerformFX Glove. I don't know much about it, but it certainly does look cool and given Dave's track record it's probably an awesome tool to work with.
The Character Shop - Uses Waldos and owns the Waldo trademark ("Waldo" was common name for these types of devices until TCS trademarked it so no one else could use it...don't even get me started on that bulls--t). They have a whole variety of devices like the one on the right, primarily developed for controlling animatronics, but presumably they could be used for digital puppetry applications as well.
One of the interesting things that all three of these systems have in common is that they're all telemetric data input devices, not motion capture technologies (which are much, much more difficult to work with).
There's bound to be other systems like these out there. Anyone know of some that I've missed?