I'm a computer science major at a research University, and last week one of my professors gave a lecture about graphics. He works and does research  with Microsoft from time to time and he actually helped them come up with the feature set for DirectX 11. One of those features is  tesselation which is essentially a method to render subdivision surfaces (what Pixar & Co. have used since after Toy Story) in real time. Of course they aren't actual subdivision surfaces, but they are nearly indistinguishable.

I was surprised to learn that the Xbox 360 has had a tesselator since its launch, but they haven't been able to use it until now. He showed us some of these examples and it was indeed impressive stuff, and I was extremely surprised to see an awesome rendering of a Vortigaunt and the Heavy from TF2. Apparently Microsoft has been working closely with Valve on this, and they've actually implemented it in some of their older games. Imagine this without all of the sharp corners on the bullets, his head, ears, and collar and you'd have an idea of what tesselation does at the base level.

     From what I've read, tesselation is possible on the PS3, but the RSX chipset isn't well-suited to dealing with the massive poly counts that tesselation creates. This has me wondering if the 360 might be able to compete with or even better the PS3 as developers start to take advantage of this feature. Tesselation allows for much much higher poly counts without any hit in performance as it travels along the pipeline in low-poly form to bypass bandwidth limitations (basically the data is compressed to allow the higher poly models to get through bottlenecks at a faster pace). Either way it seems to me the 360 won't have any problem staying relevant graphics-wise for the next couple of years if developers can take advantage of this.