This paper focuses on the development and evaluation of a haptic enhanced virtual reality system which allows a human user to make physical handshakes with a virtual partner through a haptic interface. Multimodal feedback signals are designed to generate the illusion that a handshake with a robotic arm is a handshake with another human. Advanced controllers of the haptic interface are developed to respond to user behaviors online. Techniques to achieve online behavior generation are presented, such as a hidden-Markov-model approach to human interaction strategy estimation. Human-robot handshake experiments were carried out to evaluate the performance of the system. Two different approaches to haptic rendering were compared in experiments: a controller in basic mode with an embedded curve in the robot that disregards the human partner, and an interactive robot controller for online behavior generation. The two approaches were compared with the ground truth of another human driving the robot via teleoperation instead of the controller implementing a virtual partner. In the evaluation results, the human approach is rated to be most human-like, with the interactive controller following closely behind, followed by the controller in basic mode. This paper mainly concentrates on discussing the development of the haptic rendering algorithm for the handshaking system, its integration with visual and haptic cues, and reports about the results of subjective evaluation experiments that were carried out.