Check out Geoshred[1], developed as a collaboration between Jordan Rudess and researchers at Stanford University. Its using a physical model for the guitar as well as audio FX (which tend to be easier to get good sounding than acoustic instruments).

In the domain of pure research, Kurt Werner's work in physical models of 808 circuits is also pretty cool [2].

[1] http://www.moforte.com/

[2] https://ccrma.stanford.edu/~kwerner/