Look at what I and my team made in a couple hours at the Kinect Workshop (run by David Kim):

There are “buckets” of paint on either side of the space. One can grab paint and draw it all over your body and your friends!

Only two people can play at a time. “Sorry”.

Download the code here (incredibly incredibly half-assed; we made it in 2.5 hours):
http://code.google.com/p/kinectbodypaint/

Uses the Kinect SDK 1.5 (easy to convert to 1.0). Currently, hit-testing between points uses the 2D pixel distance, not the 3D spatial distance. This can be awkward as you pass your arm in front of your body. I might update this later. However, if you want to mess around with the code, let me know!

Credits:
Dustin Freeman
Andrey Mokhov
Ivan Poliakov
Christian Holz