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Touchless enables touch without touching by using a webcam to track color based markers. Touchless includes two parts:

Touchless Demo is an open source application that anyone with a webcam can use to experience multi-touch, no geekiness required. There are 4 fun demos: Snake - where you control a snake with a marker, Defender - up to 4 player version of a pong-like game, Map - where you can rotate, zoom, and move a map using 2 markers, and Draw - the marker is used to guess what…. draw!
Touchless SDK is an open source SDK that enables developers to create multi-touch based applications using a webcam for input, geekiness recommended.
This project is an Office Labs community project, which means a Microsoft employee worked on this in their spare time. It is also an open source project, which means that anyone can view, use, and contribute to the code.

FAQ

What is the Touchless SDK?
The Touchless SDK is an open source SDK for .NET applications. It enables developers to create multi-touch based applications using a webcam for input. Color based markers defined by the user are tracked and their information is published through events to clients of the SDK. In a nutshell, the Touchless SDK enables touch without touching.

What is the Touchless Demo?
The Touchless Demo is an open source application that anyone with a webcam can use to experience multi-touch, no geekiness required. The demo was created using the Touchless SDK and Windows Forms with C#.

What does open source mean?
Open source means the source code for the Touchless SDK and Demo is available for anyone to see, to use and to contribute to. For more information on open source check out the Open Source Initiative.

Are there any restrictions to using the Touchless SDK and Demo code?
Yes. Touchless License uses the Microsoft Public License (MS-PL).

Why is Touchless open source?
There is so much potential with Touchless, however Office Labs has limited resources so we would want to encourage anyone to contribute and benefit from this project.

What are the requirements for Touchless?
Windows Vista or Windows XP
Webcam
Color Markers (M&Ms, ends of pens, painted finger nails, etc.)

Read more FAQ here