My friend and I got to play this at E3. They weren't quite done, but the game was still quite impressive. The developers were really cool, and we got to talk to almost everyone on the team, except pretty much the project lead. (We got t-shirts, acquired by winning 4 person races, signed by them too.)
It's graphically just as good as Gran Turismo 4. There is just as much attention to detail, and the Xbox does have a bit more horsepower than the PS2. The gameplay is designed to be a road course simulation, and the road physics feel just as realistic as Gran Turismo. The corkscrew turn on Laguna Seca was just as tricky as ever.
Essentially, this is going to be Gran Turismo for the Xbox, but there are a few differences. Forza is designed to be the most realistic road simulation out there; they won't even have dirt tracks, so no rallies or rally cars. They will have point-to-point races, however. Car damage was visually implemented in the E3 demo, but did not affect car performance. I'm not sure if they will be adding that, but if there is, I'm sure there will be an option to turn it off. The other thing is that Microsoft will be pushing the Xbox Live support on this game a whole lot. Also, there will be Ferraris. (though I guess that's still up in the air for GT4.)
The only downside to Forza is the fact that there's no Logitech Driving Force Pro for Forza. The wheel we had to use at E3 was a distant, distant second in quality compared to the DFP. I don't even remember the name of it, or any other non-logitech wheel we used while there.