GT2 also has absolute crap for graphics (I bought it after GT3 and I can barely stand to look at it for more than 10 minutes), the physics engine is subpar by comparison, the sound isn't as good, and it uses two cd's. Not to mention that it is slow, has hideous colors, and is terrible to navigate around in. GT3 has force-feedback controls specifically built in (for those of you using wheels) and takes full advantage of the dualshock2 controller, something that GT2 does not. If you want GT2, play GT2. I like a game that looks, sounds, feels, and navigates as good as GT3 and I'm not willing to give any of that up for something that I (and a very large portion of the GT buyers) wouldn't use at all like damage.
Yes, GT2 allowed for damage, but the game *sucks* in comparison. Look at the two side by side if you can or just play one right after the other and it'll be plain as day. Unless you're just hopelessly biased, you'll wonder why you'd ever pick up GT2 when a game like GT3 was available.
Of course, as I mentioned above, think of what you'd sacrifice out of GT3 in order to add damage to the physics and graphics engines of the game. Do you want generic "damage" that just disables your car or do youw ant damage that applies to the parts of your car that actually underwent impact? You want damage to vary according to speed, the weight of the car, and the strength of the frame; as well as that of the object or car that was hit? You don't just want it to track your car, but it has to track all this for six cars, of course. Do you want to keep track of objects that were hit? Every pixel on every car and track would have to be detailed and variable with the angle and power of the impact in order to fully embrace the realism of damage. Oh yeah, and your driving would have to get worse if you took a hard hit and your game may delete if you impacted hard enough to kill your driver. What fun! But if you want the real simulation experience, why stop at anything less than that?
Yes, GT2 had damage, but it was crappy just like everything else in GT2 is in comparison to GT3. In order to give GT3 a respectable damage system, it would take a lot more resources than it took to do it in GT2 or it'd be the equivalent of throwing a $100 paintjob on a Porsche. Tacky...