They have a got a lot of time left, yes, but considering GT4 looked as good, if not better, than the original Forza despite running on such a comparatively weak platform, I shouldn't think there'll be much of a contest between GT5 and Forza 2.
People bring this up a lot, but the fact that Forza 1 had damage modelling changes how this should be compared IMO. Having 1 static model versus having a car with numerous damage states, independant across the various segments of the car, has its tradeoffs. Even if a car only has 3 damage states for all the parts, you are looking at significantly increasing the number of poly models, textures, and the overhead related to tracking and calculating these changes. Basically a more dynamic car model may preclude certain pre-baked rendering techniques. Same thing in mind with the 360 version (plus the fact users can now paint their car in great detail, and this is shown online).
I guess it is really a matter of what is important to the user: Does the user want a very pretty, albeit very static, experience or does the user want something that reacts to their input. It is much like the 60fps v. 30fps debate. What looks better: A nicer model and effects at 30fps or some reduction in fidelity but an edge in fluidity?
I guess what I am pointing out that even though Forza and GT4 are in the same genre they have significant differences in core gameplay/style and how they go about presenting the experience to the user. If Turn 10 had made Forza a cookie cutter GT4 it would be easier to compare, but as is the fact Forza 1 has damage modeling on the cars the dynamic to "graphics" shifts a bit IMO.
And as previously noted by someone else, dev team size, time, and budget play a role into these things.
Ps- As for the GT:HD comment, as weak as many of the FM2 shots look, I haven't seen any get
even remotely close to this. As much as I have badgered FM2, I ain't even gonna touch GT:HD comparisons to it...
Correction: It was kindly pointed out to me that Forza 1 supported custom paint jobs as well, offine and online it seems. Please pardon my casual Xbox/PS2 gaming as I am a po' Nintendo gamer...