maybe it can be included client side so that all objects in a certain region around the player are calculated and the rest not.
I dont know about this but I think the client must have a glimp idea of whats happening around the char already for things like hit detection, collision detection (I now, not really working

) , etc. So it already knows, whats on around him then a simple if -> then function should work. (if object hits wall then apply bumpmap on wall at position of hit)
and by the way, there are good looking good gameplay mmorpgs out there. Only diffrence is that in fact their commercial and have big, expensive servers, I dont know how the ps server is organized and what bandwidth it has...