Going through my parts bin, I found a Synaptics touchpad from an old laptop and figured this should just work as a replacement.
Ok, when I say 5$, i mean really cheap. Clearly a loose arduino is already 20-25 USD (but you can replace it with just a bare ATMEGA168 chip for ~2 USD) , and this touchpad would probably cost you some money aswell, when you are not able to salvage it from an old laptop.
WARNING: the Kaoss pads and similar hardware all have built-in audio outputs, this project does not ...
Step 1: Find the signals
This website had the picture you see here. From this I figured out which of the testpoints on the board (wow, many!) where connected to these 3 pins. (see second picture).
I'm not quite sure if the T1001 controller is similar in pin-out to this controller, but the signals shouldn't be too hard to find if you know what to look for.
Step 2: Soldering to the touch-pad
The main trick is to use pretinned wires and first get a small island of solder on the testpoints you have found. Be careful to not put too much heat on the touch-pad, the copper can very easily get loose from the pad by overheating.
For ground I soldered to the big square connection (see also the pin-out image), but there are many more places where you can get ground signal.
After this step, you probably want to secure your soldering with some hot glue or similar product for strain relief.