There's a growing discussion on the FM3 forums about the cars being lower detail outside of replays and menus.
I can't say I noticed much myself, but the pictures some people have posted prove otherwise.
It could be the demo has an LOD bug. What tends to happen is they have 2/3 version of a model and they change according to how far away from the opponents you are. Maybe there is a bug in the demo and the correct LOD is not being displayed, or they are being very cloak and dagger about the 10x more detail which is not actually used when racing.
It's not a big deal for me, but the photos of the in-game models I've seen do seem to be poorer than MF2, esp the Minis headlight surround. Fingers crossed it's just a glitch.
There will be more than 2/3 LODs, but thats to be expected. 10x more detailed models is probably true, but it will only ever be used on the very closest cars, possibly even just the player car. There's no way they can have 5 cars with 200,000+ polys each. They'll quickly half that, then again and again it will drop fast as the cars get further away.
The demo may have poor LOD distances that they hope to improve as the game is optimised for release, if they do eek out any more performance it will be high on the list of priorities. But don't go expecting massive improvements.
GT5 has the same limitations, they just hide it a bit better, look at Prologues rear view mirrors though and it's very obvious.
Played the demo a bit today, it's pretty much more of the same, which is no bad thing. Much nicer cars, but they had to do that, Forza 2's were shocking in places. Colours and shading was poor but I was playing on an old LCD. Handling, didn't seem massivly different to me, which I'm pleased about.
A probable buy for me, which is rare these days, I just need to decide if there's enough new stuff to interest me.