[Edit 2010-03-15: A new project at Microsoft has been announced that looks a lot like dAb, Gustav]
In 2000 I collaborated with Bill Baxter on a 3D paint brush system that was presented at Siggraph 2001. Less talk, more video:
dAb: Interactive Haptic Painting with 3D Virtual Brushes (Siggraph01)
Bill continued the line of research for his PhD, and you can see some great improvements to the paint model and brush simulation:
IMPaSTo: A Realistic Model for Paint (NPAR04)
A Versatile Interactive 3D Brush Model (PG2004)
Over the years, we've had a few large companies inquire about licensing the research. I'm excited to say that we've closed a package deal for several systems! Perhaps you'll see this technology in consumer applications in a few years.
For more details, visit the dAb webpage.