Ian has done some great work on our material system in the visualquality branch. Most of the ideas for the material system are on the wiki now -

Some of the highlights are support for materials on polylines; a glow effect for polylines; the ability to combine materials, e.g., combine a procedural brick material, bump map, and specular map to create a crumbling brick wall with wet spots; and support for multiple lights. Not all of this is implemented - or even designed yet - but Ian is moving fast.