Yea, it'l look better. I laughed at that IGN article. Its like they asked Kaz whether it was real or not and he was like 'What the fuck, are you kidding me. Of course it's real!'

Well, i think its safe to say that GT5 will be the best looking game out... when it releases.

I don't know. =P

Just my guess, I don't want to set my expectation way to high to get disappointed.

It's obvious that the majority of the scenes are in game, except for the city scene where the Citroen C4 turns on to the street, which is almost too god to be true (aside from the tram tracks).
BUT, why can't in game people walk like people (even though it's irrelevant to a racing game), and the jet plane smoke trails are no fancy 3D volumetric particle effects, and the dust the Citroen C4 rally car leaves behind is kinda low tech too. So see, it ain't perfect yet.
(Interesting how much Citroen appears associated with GT5 no?)

There's a massive difference between "in engine" and "in game"

In engine cut scenes can have all the processing power dedicated to visual effects, while you are playing the game you have physics & AI caculations to deal with at the same time plus all the visuals have to be rendered in real time at 60fps . Cut scenes can be buffered and don't have to run at such a high frame rate either.

These arent cutscenes,  the are replays of actual in game racing.  Just like the videos of Forza 3

True, but replays can also benefit from the extra resources available (no AI, less physics, less fps) for some extra real time image processing. 

Same thing

If you aren't using your controller to move things around, it's not "in game"

That's Natal screwed then.

Ok, well I just wanted to make sure so I dont get excited about "other" games doing the same thing