I know you are planning to go digital. But when I read your title my first thought was a physical ball that was rolling. Just kicking around some ideas, but you could have a sphere driven by two motors underneath. The driving of this seems easy enough, but I think you would have issues with losing position if it slipped. So my next thought was how the old school computer mice worked. They tracked a sphere rolling. I wonder if you could use the same sensors to track the position of the sphere and have a closed loop system. My final thought was you probably need some sort of calibration system to zero the sphere back to due north. This could be done with a magnet in the sphere and a sensor. 

Anyway, cool project and I look forward to seeing the projector version. I just couldn't help but let my mind wander as to how I would try to solve the problem. I figured I would leave the comment in case someone else was interested my idea. 

jupdyke, you're ideas aren't actually too far off from the real thing, although the challenge comes from the fact that you need 3 degrees of rotation. The whole  concept is explored in great detail here: http://forum.kerbalspaceprogram.com/threads/50308-WIP-The-REAL-Nav-Ball-Project-Thread

its a good read, there's some pretty interesting stuff in there. I actually thought I had referenced it in this project already...

You can get cheap LED projectors for about $50 on sites like dealextreme etc.

And by cheap I mean terible resolution - 320x240(or 480x320 at best) and 400 lumens. Both of whitch are irelevant when display is small and at close distance.

What is good about it is that the power consumption is relativly low 12V and 2A at 24W and that you can easily drive composite video out from arduino or HDMI out from raspbery pi.

About the curved frosted glass you can probable get replacment light globe in IKEA or some other furniture store.

Thanks for the tip! Sadly, a normal projector is not really usable, as it will no doubt be intended to be used as a normal projector -- this means using a normal focal length. If I were to use a projector like that, I would have to order special custom optics to recondense the image correctly. This is why a laser projector is typically used, and with them being so expensive, not really feasible for my projects.

what about those lenses you get for DIY phone VR headset. They are designed for short distances. And you would be suprised what kind of lenses are availyble on ebay for cheap. 

Here they are using picoprojector and fisheye 180° lens

http://eclecti.cc/computergraphics/snow-globe-part-one-cheap-diy-spherical-projection

I'm aware of the possibilities available, but going the route of optics is still very difficult. It's interesting you point out the picoprojector project, as that is exactly the one I am talking about when I say that a laser projector is usually used. Also, that gentlemen has a 3D printer, so he is able to make mounts with all the correct geometry very quickly and easily. I will be losing what little access I have to 3D printers very soon.

Really though the biggest thing that I tend to try and work into my projects is repeatability. I have seen so many projects that use odd, expensive, or discontinued parts, and find them very frustrating. My projects will always focus on using cheap or generic parts so that when someone else decided to do something similar, there is a reference that doesn't require a 3 million dollar CNC mill or a custom-made IC.