Not only walls and buildings, but liquids and gases can also be modified in real-time by the environment as well. One famous movie of this in action is a stream of molten metal being completely redirected. The person controlling the player fires a rocket at the stream, and the stream starts filling the hole that was created next to it. Eventually, the player was able to turn the stream a complete 90 degrees. Diverting away from all of this real-time stuff, the Volition team is also implementing a great physics engine into Red Faction as well.
Gravity affects everything now, including weapons and buildings.
Bullets that are fired over extreme distances also succumb to gravity and loss of speed as well, meaning that sniping most likely won't be just point and click any more. You'll have to take time to consider the distance of the target as well. Everyone that has had a rudimentary physics class knows that this should happen. So, now you're probably wondering if you'll need a supercomputer to get a decent frame rate with all of this real-time mumbo jumbo going on. The movies that Volition has put out showing the engine in action have been running on a PIII 450 mhz with 128MB of RAM and a 32MB GeForce 2.