Usually, you're just manipulating samples, with vst plugins. But also, there are tons of vst "virtual instruments", with an endless supply of built-in samples, that you can play like an actual instrument. I'd suggest just messing around in Fruity Loops to start.
One cool thing I saw once was a guy that used a log. He had a log with 7 nails in it, and in between each nail was a thin guitar string, with a contact mic built in underneath it all, so if you plucked the string a high pitched, uh, noise would eminate. The "log" itself didn't do much beyond just look cool but hey. Anyway, he had that all plugged into a laptop, which was plugged into the PA. He would play a little note and then immediately manipulate the fuck out of it on his laptop. so, one little note he played could be sustained for a good minute and he just subtlely (and sometimes, not-so-subtely) fucked with it via vst. Cool.
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