There has been an explosion of experiments with various forms of digital puppetry in the past couple of years, but we're still lacking a true "killer app" that makes real-time manipulation of digital characters simple an intuitive. That doesn't mean that progress isn't being made though; little breakthroughs are being made all the time. I've seen a number of interesting experimental interfaces in the past year, including this one created by Quan Nguyen and Michael Kipp, who have attempted design a simple, user-friendly multitouch system that can be used to control the complex movement of the human arm.
From their research:
"Controlling a high-dimensional structure like a 3D humanoid skeleton is a challenging task. Intuitive interfaces that allow non-experts to perform character animation with standard input devices would open up many possibilities. Therefore, we propose a novel multitouch interface for simultaneously controlling the many degrees of freedom of a human arm. We combine standard multitouch techniques and a morph map into a bimanual interface, and evaluate this interface in a three-layered user study with repeated interactions. The multitouch interface was found to be as easy to learn as the mouse interface while outperforming it in terms of coordination...Our results show that even complex multitouch interfaces can be easy to learn and that our interface allows non-experts to produce highly coordinated arm-hand animations with subtle timing."Quan and Michael are members of EMBOTS (Embodied Agents Research Group), a research group based in Germany. They've worked on a number of interesting projects with digital puppetry applications; you can find an overview of their work here.