I don't think phisics is a big lag problem, from what I've seen in HL2 and F.E.A.R, corpses and physics objects already interact with each other without killing your computer. There will be destructable terrain, but it will be restricted to a few maps and won't be too extreme (you can't make the map look like the surface of the moon if that's what you want.) Flying debris from explosions would be AWESOME, some of you say that it would get annoying, but it'll be just like dodging flak shards. Besides, wouldn't you like to see a bus get flung into the air and land on a Manta? That would be entertaining. As for LIQUID PHYSICS, if the Unreal Engine 3 is capable of liquid physics, THAT...would be amazing. Imagine the moddability of liquid physics, you can have paintball and super soakers, you can effect a map by blocking a stream, causing it to overflow and your enemies to drown.
If the physics would allow any of these features, we'll have a lot of OMFG, Holy Sh*t moments, kinda like the first time you play HL2 and decide to repetitively throw a crate at a Zombie only to find out that it gets fragmented per hit. Or the first time you killed a headcrab and decided to beat it with your crowbar, causing it to tumble down the street in a satisfying fashion.