There was an evolution in damage from Forza 1 to Forza 2, and on the web there are details on how Team 10 had to attempt to twist manufacturer's arms to convince them to go to the next level. For example, in FM1 you had parts hanging off the car, and not falling off. In FM2, parts fells off.
Anyone arguing that no damage is better than having as much damage as car manufacturers allowed, is simply being a partisan fanboy.
There are a few elements we have to look at when it comes to damage. Personally, my primary concern is realistic collision physics, not necessarily damage. But I'm hoping both go hand in hand in any future update to the GT series...
There is:
-The deformation of cars (only affects aerodynamics and wind physics)
-The damage incurred on your suspension, brakes, engine, tires (not the tires themselves, but a crumpled car can rub against them), steering, etc. All affecting performance.
-The ability to roll your vehicle (car manufacturers seem very against this)
Personally I was first hoping for damage affecting performance first, rather than simply having it look like it's damaged. If I were to look at Yamauchi's words alone (rather than reading between the lines), it sounds like he's just going for the physical aspect and not having it affect performance (the PGR series is like this).
BTW I think Land Rover was already sold.