FluidPaint: An Interactive Digital Painting System using Real Wet Brushes. An experimental project by Tom Van Laerhoven of the Hasselt University Expertise Centre for Digital Media in Belgium. Unlike previous digital painting applications, this one uses actual water (detected by a surface-level IR emitter) to record strokes on the surface and more correctly models the tip of the brush being used, whether rounded or fanned, and it can even simulate a sponge. Looks like it makes some convincing watercolor-like images.
More info: Brush Design for Interactive Painting Applications (PDF)
(Via John Nack at Adobe)