Behold, the composting toilet. 
mid 19th Century composting toilets
Today's composting toilet - not bad eh?
Composting toilet systems have four basic components: the seat fixture, the chute, the composting chamber and the ventilation system.
image from http://static.howstuffworks.com/gif/composting-toilet-diagram.gif
The principle is simple. Human waste falls down the chute into the composting chamber. Usually a scoop of composting powder or sawdust is added to the chamber after each use.
Some systems actually utilize a microflush system that uses less than a liter of water per flush. In microflush systems there is usually either a small heating system to facilitate drying or a small leachate drain that takes excess water to a drain field or engineered wetland. There are also vacuum systems that allow for the waste to be delivered to a chamber located on the same level or even above the fixture.
In the composting chamber, microorganisms gradually break down the waste into compost. After a certain timeframe, aged compost is removed and can be used as fertilizer, the composting process having broken down harmful substances in the waste.
The ventilation system usually uses a small electric (often solar powered) fan that creates a mild vacuum in the chamber and ensures that any offensive odor is vented to the outdoors. In my research, most composting toilet users are very surprised to find they have no odor issues.
There are a few potential drawbacks to composting systems:
Additional composting materials: There will be the additional expense of purchasing and replenishing a supply of sawdust or composting powder as a scoop is placed in the composting chamber after every use.
Additional maintenance: Composting systems do require some minimal periodic maintenance to rotate and/or remove compost. Although some of the products have mechanical systems that automatically ‘stir’ the compost, many systems require someone to manually pull some sort of lever to stir the compost. Depending on the system type/size and frequency of use, the composed needs to be removed anywhere from every two weeks to every two years or longer.
Biodregadable items only: Care must be taken not to place trash or other objects in the chamber that will not quickly break down. Cleaners and other chemicals must not be ‘flushed’ as they potentially harm the friendly composting microorganisms and could contaminate the compost. Also no cigarettes or open flames (for obvious reasons).
Permitting and approvals: Many municipalities are not familiar with this technology and it may not be part of accepted standards. Thus, there is often an extended review process involved. One should definitely meet with the appropriate governmental agency well before installing a composting system.
Expense: Cost varies widely in composting systems but quality systems can be purchased for around $1,500, comparable to the cost of installing a conventional septic system. The paybacks are more immediate if these systems are employed in new construction. In more urban applications, where septic systems are not utilized, composting systems will likely have a 5 to 10-year payback period, depending on the water and sewer rates charged by municipalities. For a family the size of ours (5) here in Asheville, we would expect to see a savings of at least $200 per year on our water/sewer bill if we used composting toilets instead of conventional reduced flow (1.6 gallons per flush) fixtures, and over $400 in annual savings over conventional, full-flow fixtures. Overall, my guess is that composting toilet systems are ultimately much more cost effective than this...
In Asheville, water treatment systems and associated water department activities account for over 40% of the city's municipal electricity use and takes up nearly 1/3 of the municipal carbon footprint. This magnitude of resource consumption is similar for other cities and towns across the nation. Composting human waste offers tremendous potential savings when you consider that about 1/3 of the water that is used in residential homes is flushed down the toilet.
All in all, the small inconveniences incurred in using composting systems would appear to pale with respect to the amount of water and energy that these systems could potentially conserve. Here are a couple of other sites that contain additional information on composting toilets:
