If you use Maptool as your VTT, you won't have to have your players avert their eyes, as it has dynamic lighting and vision.
You just run 2 instances of MT on your laptop; one for GM view, which you keep on your laptop screen, and one for a player's view, which you send to your projector. When a player moves their miniature to the edge of a revealed area, you just move a digital token to the same spot as the player's miniature, and click to reveal vision. What's really great about MT is that each miniature can have both individual types of sight (like low-light and darkvision) and light (candle, torch, lantern, etc.).
In regards to creating 3D maps, someone over at the RPTools forums has already done that, and it looks killer! I'm looking for the thread, and will post it here as soon as I find it. I believe he just used styrofoam, but with the image projected onto a 3D surface, it looked really cool.
I've been using MapTools for several years now, and I've walked quite a few GM's through it and showed them how to use it. Anyone interested in taking a look at it, just PM me here and I'd be happy to set up a time to get online and show ya the ropes.