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The real KZ2 has much better lighting, particle effects, and fire than the original CGI trailer. The trailer, however, has somewhat better animations and polygon count, and much better texture resolution.

I'd say we're getting there, no doubt. People mocked Sony for setting the bar too high, promising insane graphics that would crush the other systems. Well, they're reaching those graphics (Heavenly Sword and Uncharted actually exceeded their initial trailers). They certainly didn't set the bar too high for themselves, it's just that nobody expected the 360 to keep pace with the ps3 like it has.