0.5 * 10^-3s is 2000hz, so 20 iterations per frame, assuming they render at 100hz, that seems a bit on the high side.. does that mean they don't have a good way of interpolating the physics effects, does that happen a lot in these kinds of simulations?

I work on a real-time multi-player game, and our physics step is actually larger than our framerate, we interpolate the rest, I guess that's quite the opposite of this :)