An interactive display projection system, includes a pointing device which determines a location on the projected display indicated by the pointing device using a combination of a location signal in the display captured by the pointing device and optical mouse circuitry to determine motion of the pointing device when the pointing device is close to the projected display. In another embodiment, the pointing device also includes an inertial sensor and associated circuitry which detects linear accelerations and rotational rates to determine motion and orientation of the pointing device, which are also used to determine the location on the projected display indicated by the pointing device.