I experimented with fluids about five years ago, at Meqon. Back then I didn't really have a clue about fluid dynamics. I guess it's fair to say I still don't have a clue about fluid dynamics, but I did read a few papers lately on SPH.
It's kind of remarkable really, how complicated all those papers are written just to land at something that is quite simple. Sometimes I get the feeling that the research community are intentionally making scientific papers look more complicated to boost their egos. I wish there were research papers written for engineers, not other researchers, where you could read stuff like "And when this little fellow gets squished, it kind of pushes outwards on all the neighboring particles, proportional to their respective distance and density."
I don't like formulas. I can read them, but it's very unintuitive for me, and probably many other programmers. I tend to believe that 3D computer graphics programmers are especially prone to finding formulas unintuitive since we are trained to visualize complex things in our minds. It's easier to visualize a description in plain english than a mathematical formula. For me at least. Maybe I just suck at math :)
A good engineering resource for physics is Danny Chapman's rowlhouse. There is source code to his physics project, jiglib, including SPH simulation and also his comments and ideas.
Back in 2005 I couldn't simulate running liquids, but only goo and clay-like fluids. I realize now that it was related to my urge to express everything through pairwise interactions. One would believe that a particle-based fluid is just a bunch of point masses interacting, but in SPH, a particle represents a sample of the implicit field, not just a point mass.
Anyway, so I implemented fluids in my solver, first as plain SPH, but I found it difficult to tweak, quite unstable and it doesn't interact well with rigid bodies, so I was searching for a semi-implicit formulation instead. It was actually quite tricky to come up with the right formulation, but eventually I think I nailed it. It looks good, it's unconditionally stable and it interacts naturally with rigid bodies without any hacks. Since it's semi-implicit it does get squishy at low iteration counts, but hey - fluids are no more incompressible than rigid bodies, right?
Oh, and a note on performance - no they are NOT real-time simulations. Quite far from it actually. The second one runs at maybe one fps. Surface generation takes a good amount of time, but the number one bottleneck is actually neighbor finding. I haven't looked into it that much, since it's madness doing this on a CPU nowadays anyway, but it's kind of frustrating that something sounding so simple is the most time consuming part. Finding the neighboring particles is usually three to four times as expensive as running the solver. What's even more frustrating is that it's probably mostly due to cache misses, so laying out the whole arsenal of SIMD tools is not going to help even the tiniest bit... the whole pipeline should scale well with cores though, so could someone please get that Larrabee going again?