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MS said:

"We congratulate Sony and Guerrilla Games for their efforts with Killzone 2, however this is only the beginning of a new wave. The current technology employed for certain unannounced Xbox 360 exclusives far surpasses what gamers have seen in any game so far".

Meaning K2 surpassed anything ever done on a console (pre U2).

Meaning MS believe x360 can do better than K2, but as it hasn't been done yet we will have to wait and see.
PS3 will also improve so the goalpost is always moving.

What is annoying is that so many bias pro x360 fans cannot accept currently PS3 have the upper hand graphically, whereas the people that really matter, Microsoft, can admit this.