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I believe the engine bungie have created will be able to make games that beat KZ2 in graphics etc when used by someone who wants to make a realistic looking game. For Reach it wont because of the Halo are direction.

It seems people have got the wrong idea of what bungie are doing with regards to the graphics.
"It is noted that while, as the title implies, ODST is built upon the Halo 3 engine, Reach is going to be a from-the-ground-up new experience, representing a major step forward in engine technology and a complete reinvention.

"Reach will be a full three-year cycle -- it's got all-new tech, akin to the change from Halo 2 to Halo 3," Jarrard said. "

From the bungie site
"Demonstrate technical excellence and lead by example while working with our team to code the fastest, cleanest graphics engine ever seen on this or any other planet."
http://www.bungie.net/inside/jobs.aspx#job12960

And this
"Ever since the news of a new engine being employed by Bungie there has been huge speculation on its nature and platform of content that it will incorporate Steve Theodore (Technical Director) at Bungie has spent the last two years on “Researching new graphics tech and helping to evangelize it within the team.”
http://www.skoar.com/features/games/halo-reach-revelations-new-engine-legends-explores-reach.html?Itemid=48

All bungie (as far as i'm aware) have said is that they are working on a new engine and Reach will be finally be Halo in HD. Nowhere have they said it will have the best graphics.
If anyone has said that I'm betting it's 360 fanboys or MS PR (same thing) or maybe started deliberately by PS fanboys to create unrealistc expectations so they can knock it when it doesn't live up to the hype

That last bit was a joke. I was on N4G recently and that's one of their excuses for PS overhype.