Check out this awesome Arduino controlled Digital RGB LED Strip. There are 32 LEDs per meter of the strip and they can be shortened or extended quite easily.
With this I can programmatically set the color of each LED’s red, green and blue component with 7-bit PWM precision (so 21-bit color per pixel). Below you can see my demo of it running through a test script with several different effects going on.
You can buy your own LED strips from Adafruit here: http://www.adafruit.com/products/306
Special thanks to John Cohn for hooking me up with these! (John, you can borrow my Arduino stuff anytime!) You can see John wearing a headband made of the same type of LEDs on his Wikipedia page and possibly spot his nearly famous LED hula hoop in one of his many blog posts. The project opportunities are endless. I’m hooked.