Realistic behavior of computer generated characters is key to bringingvirtual environments, computer games, and other interactive applicationsto life. The plausibility of a virtual scene is strongly influenced bythe way objects move around and interact with each other.Traditionally, actions are limited to motion capture driven orpre-scripted motion of the characters. Physics enhance the sense ofrealism: physical simulation is required to make objects act as expectedin real life. To make gaming and virtual environments truly immersive,it is crucial to simulate the response of characters to collisions andto produce secondary effects such as skin wrinkling and muscle bulging.Unfortunately, existing techniques cannot generally achieve theseeffects in real time, do not address the coupled response of acharacter's skeleton and skin to collisions nor do they support artisticcontrol. In this dissertation, I present interactive algorithms that enablephysical simulation of deformable characters with high surface detailand support for intuitive deformation control. I propose a novelunified framework for real-time modeling of soft objects with skeletaldeformations and surface deformation due to contact, and their interplay for object surfaces with up to tens of thousands of degrees of freedom.I make use of layered models to reduce computational complexity.I introduce dynamic deformation textures, which map three dimensional deformations in the deformable skin layer to a twodimensional domain for extremely efficient parallel computation of thedynamic elasticity equations and optimized hierarchical collisiondetection. I also enhance layered models with responsive contacthandling, to support the interplay between skeletal motion and surface contact and the resulting two-way coupling effects. Finally, I present dynamic morph targets, which enable intuitive control ofdynamic skin deformations at run-time by simply sculpting pose-specific surface shapes. The resulting framework enables real-time and directable simulation of soft articulated characters with frictional contactresponse, capturing the interplay between skeletal dynamics and complex,non-linear skin deformations.