As of right now, nobody knows.
But we do know they are working on a real time damage deformation system unlike the other racing sims which use pre calculated. In forza 3, for example, the damage isn't "Real" per say. It just uses one of the stock damage setups and applies it and it knows which one you'll receive before you hit the wall.
And no kowenicki, the damage modeling in forza 3 is no where near life like. It's only a very very minor increase from what was in forza 2. Which is fine though, because its still leagues better than everything else on the market.
We dont have any physical proof of what PD is working on, though, from what has been shown it is already at a higher level, at least in terms of visual model, than what forza 3 will do.
The issues with forza 3 for me are;
1) every car looks the same when it gets damaged in any way. It doesn't matter where i hit or how, the damage is always the same.
2) collisions do no deformation to the actual structure of the car, it just makes a small indent in the front.
3) It looks highly unrealistic. The problem with this is that the models in forza 3 are breath taking, but the damage models are not any better visually than those in forza 2, so it just looks off.
That being said, its still the best out there, and no damage model is going to be realistic. You can make complaints about any of them, and they are most surely valid.
The thing that Turn 10 have done is delivered a game, which, in all we know PD may never release GT5.
Turn 10 took reasonable shortcuts and made a game that, while no where near as ambituous or complete as what gt5 aims to be, is managable, pleases its fans, and gets the job done.
all the while, its a great unique racing sim with things that are far better than damage. I wish we could talk about the great things forza 3 does like
1) an unmatched career mode. Simply amazing. I wont get into details to spoil it, but its the modern warfare of racing sims.
2) Fantastic menus
3) amazing sound track
4) accessibile to all players
5) ITS RELEASED, ON TIME.








