I would use VMWare. This might be possible with just VMWare player (you will need to be able to allocate a mouse to a single VM), or you might need to try VMWare workstation (for which I'm quite sure it works). The hardware/software you will need is as follows:
At this point you have a window that is fully isolated with a set of inputs that will go only to it. You can do this for as many VMs as you can handle (and for as many sets of input as you can handle - I only tested with 2). The only irritating thing that can happen is is you have only 2 sets of inputs (in my case my laptop keyboard, my USB keyboard and 2 USB mice). I set up a VM with my USB Keyboard/Mouse combo, and maximized that to one monitor (you need VMWare tools to do this). For the other I had a problem that my mouse could escape from one VM onto the other (a feature of tools); to get around that I put my second VM in "exculsive mode" thus caputuring my "host" input; I could also have had a second keyboard/mouse combo.
Best of this is, you don't even need multiple monitors, you could do it split-screen style with a bunch of VMs+keyboards+mice.