Translucency is an area that needs more work.
You can't see it in the video, but that flying monster has translucent wings which look really neat, apparently.
That plus highly destructible environments are going to seriously change how games are played
Yeah but it's a tough challenge - the second the player comes to an indestructible wall (that shouldn't be so - think a brick wall on the edge of a town, a gate that can't be opened by ramming it with a tank - the effect is massively reduced. This means the edges of every map have to be things that are intuitively indestuctible, or water, a la FarCry.
But yeah, it has to happen in the end, and as you say, when it does, it will change how
games are played.
Realistic water is something else. Not just Source-style fresnel term refracting water, but I remember in an early interview, someone asked Gabe if there was a barrel of water, and you shoot halfway up the barrel, does water flow out until the level of the bullet hole (presumably leaving the barrel half empty or half full, depending on your outlook :)) That sort of thing - water physics
is (I'm sure) unbelievably complex, but would allow for some cool puzzles.
This engine is ahead of HL2 and Doom3 simply because it is aimed at 2006 hardware. HL2 and D3 were aimed at 2003 hardware (earlier in D3's case IIRC).
Insert funny quote here