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I don't know where this notion of graphics and quality being mutually exclusive come from.

The current big dog is DX10, which makes current consoles look comically bad.

Crysis
http://www.youtube.com/watch?v=pPi0AhQgrDs

Far Cry 2
http://www.youtube.com/watch?v=tU7lyFmgeFg

Is it just great graphics? No, it's complex calculation. Instead of "pre-broken" stuff you can calculate things breaking apart so it does it in a unique way every time. Obviously this doesn't only apply to leaves moving realistically when you brush against them, but this also means thousands of zombies on a screen at once, truly dynamic environments, and a lot of interesting tweaks. The Far Cry 2 demo explains a lot about what's possible as far as things like weather.

The thing about the last 10 or so years is that yes, for the most part it has been shader or lighting improvements: nickle and dime improvements. That basic criticism against gaming held water until very recently.

From a purely console perspective, I like the Wii for that reason--it's not going after graphics but instead a different kind of experience. The best computer in the world can give you the prettiest and most complex games in the world, but it doesn't guarantee pure FUN, and Nintendo has a monopoly on that.

As far as Nintendo, their visual glory comes not so much from graphics, but brilliant artistic design. I think anyone can agree with that. Photorealism is here already, I'm really curious what's going to be done with artistic design with that kind of power behind it.