So what is a Physics Material?
These are materials that can be applied to an object. They allow one to adjust friction, density, gravity multiplier, and restitution… and I have no idea what the restitution part is about. So, with a material you could make a balloon that floats away. Balloons are more fun indoors. Vehicles behave better with 5x gravity.
Eventually these settings will be scriptable. More testing is needed to see if there are griefer exploits the Lindens have not thought of. Once they are pronounced safe, the scripting side will be added.
Material settings do not work on avatar attachments. Avatar attachments are excluded from physics calcs, so Physics Materials have no effect when worn.
Falcon Linden is going to offer a bounty for first person to crash an Experimental Mesh region (ADITI) using Physics Materials. The region is apparently not set up yet. The controls will be in the Mesh Project viewer.
Several new features are in testing on the Preview Grid. This new stuff is coming to the main SL grid in the next few weeks. Until then you can preview it in ADITI.