Drawing in games

Altering texture shouldn't be necessary; you can record every mouse movement and redraw draw suitable geometry every frame, hopefully using efficient vertex buffers instead of immediate mode calls.
For example:
- dots on each different mouse position or lines connecting them;
- point sprites;
- point-like or line-like billboard sprites made of texture-mapped quads or triangles or triangle strips (with slightly offset coordinates around the mouse positions).

If you are doing something similar to Crayon Physics, it should be even easier: since you are already "paying" for a geometric representation of your shapes you can translate low-level mouse motions to shape alteration and render whole shapes in more organized ways such as a decomposition into texture-mapped triangle strips or polygons and/or line strips for borders.

Locking and writing to one texture once per-frame should not lag the game very much if done correctly. There are optimizations you can do. When you lock the texture don't lock the whole surface, only lock a small area around where the write will take place; this shouldn't be hard to calculate.

I assume you are creating the texture in D3DPOOL_DEFAULT with D3DUSAGE_DYNAMIC.

If you are already doing these things and its still a big lag, then I still think something is wrong...

Thanks for all your replies. I did create the texture in the default pool and I also made it dynamic but I haven't thought of locking only that specific area. Thanks for that idea Matt. Lorenzo, you also gave me a nice technique to use, but it will be better to use the texture technique as the collision detection uses a 2D surface. The way levels are structured and how the player will interact with them will also require the 2D surface.