
Each Object in Blender can get a "Soft Body" effect applied (Mesh and Lattice implemented only now). Once applied, the soft body system allows vertices to move based on the laws of physics that govern soft materials--like jello or cloth.
In the 2.37 demo files (4 MB) you can find two examples of soft bodies, softbody_basics.blend and wind_soft.blend.
There are two main methods to control the soft body effect:
"Goal"
Soft body Goal acts like a pin on a chosen set of vertices; controlling how much of an effect soft body has on them. With Goal fully active (1.0), the object will act like any regular animated object (no soft body effect). When setting Goal to 0.0, the object is only influenced by physical laws. By setting goal values between 0.0 and 1.0, you can blend between having the object affected only by the animation system, and having the object affected only by the soft body effect.
Goal also serves as a memory, to make sure soft objects don't deform too much, ending up in the non-soft animated shape.
Using the Vertex Group weight system, you can define a Goal weight per vertex.
To make this look more natural, spring forces can be defined to control how far vertices can move from their original position.

Springs
The "Edge springs" define how much the edges try to keep their original lengths. For example, by adding diagonal edges within a cube, it will become more stiff (less "jelly like"). By using edge springs, objects can keep their original shape, but still move freely with dynamics.
Springs can also be used for cloth simulation.
The Blender 2.37 Soft Body system is primarily meant to enhance animation systems (including character animation). Effects like flexible or wriggling skin are now very easy to achieve.
When you enable the Soft Body effect on an object, it will always be simulated forward in time (like ALT+A playback, or RightArrow key). Moving backwards in time or jumping in steps larger than 9 frames will reset the soft body back to its original position. Use the new TimeLine window playback to make tweaking Soft Body effects interactive.
Once you're satisfied with the simulation, you can "Bake" the simulation into a static animation system. A baked soft body plays back much more quickly, and is not dependant on simulation anymore. It is advised to bake soft bodies when rendering animations, because the simulation doesn't work correctly for Motion Blur rendering, or for rendering in small chunks via a network render system.
Using SoftBody for cloth simulation, especially with collision detection, is still in a testing stage. The current collision code requires improvements, which is scheduled for a later release.
For more precise control over cloth simulation, we will also add special edge options in a later release. Currently, all edges have an equal effect on the soft body.
Since vertices in Soft Bodies are treated as particles, the options for Force fields and Deflectors apply for them as well.
Please note that deflection (collisions) only work on non-deformed Meshes (not using hooks, armatures, lattices, etc). Check the Forces and Deflection notes for more information.

Start, End
Sets the range of the soft body simulation to be baked.
Interval
Sets the number of frames in between each baking "step" (the "resolution" of the baked result). Intermediate positions will be calculated using the steps as key frames, with B Spline interpolation.
Bake
Starts the Bake process. Depending on complexity, this might take a little while. You can press ESC to stop baking. Once Baked, this button changes into a "Free Bake" button. You must free the baked result to modify soft body settings.
Below is a getting started guide as well as a link to several video tutorials to get you up and running with Blender's soft bodies.
Tutorial Links
Tuxbot on Elysiun.com has created some great soft body video tutorials. You can find them at blendertutorials.org
This section will cover creating two of the most common types of soft bodies: "jello" objects and cloth objects. These are not in-depth tutorials (see the above links), but rather examples that should get you comftorable with Blender's soft body system.
"Jello" Soft Body
This example is relatively simple, as we won't need to worry about setting goals and creating vertex groups.
For this example, we just need a plane and an IcoSphere (2 Subdivisions). Scale the plane up a bit so its larger than the sphere. Position the IcoSphere so it's ObCenter is about 4 grid units above the plane.
Smooth out the IcoSpere by going into the Edit Buttons (F9) and activating Set Smooth and Subsurf. You can set the Subsurf level to 2 for a smoother sphere.
Now, exit edit mode and go into the Object Tab (F7). Click on the Softbody panel. Click on "Enable Soft Body." For a jello like effect, we only need to change a few settings. First, deactivate the "Use Goal" button, as we won't be needing any weighted vertices. Increase "Grav" to about 9.8 (this simulates real-life gravity). Finally, increase "E Stiff" to about 0.9. Tune "E Stiff" higher or lower to make a stiffer or more flexible jello material. (Tuning "E Stiff" to the highest level will make the sphere nearly solid).
Finally, we need to make the sphere bounce off of the plane. Select the plane and go into the Particle Interaction tab. Activate "Deflection." The default Soft Body Deflection settings are fine.
Now, press ALT-A and watch your jello bounce!
Cloth Soft Body
This example is slightly more complex than the last, but not much. Create a plane and scale it up a bit. Subdivide it twice. Go to the Edit buttons (F9) and activate Subsurf (set Subsurf level to 2 for the best results). Press "Set Smooth."
Let's add a "pin" to our cloth in one corner, so we can see the soft body effect. Create a new Vertex Group, and set "Weight" to 0. Select all vertices, and press "Assign." Now, select one corner vertex of the cloth, set "Weight" to 1.0, and press "Assign" again. This will make the vertex stay where it is during the soft body simulation.
Next, exit edit mode and go to the Softbody panel in the Object Buttons (F7). Click "Enable Soft Body." Again, increase "Grav" to 9.8. This time, leave the "Use Goal" button activated. Click the small menu button next to "Use Goal," and choose the name of the Vertex Group to use for the goal (in this case, the only choice is Group). Now, you can press ALT-A to see the cloth react to gravity. To change the elasticity of the material, tune the "E Stiff" button--smaller values will let the cloth stretch almost infinitely, while large values will cause it not to stretch at all.
Code by Jens Ole Wund. Integration: Ton Roosendaal. Release log and tutorial: Jason Saunders