There is no chance that would happen unless Microsoft is planning on selling the next Xbox for at least $2000. Even then it may simply not be possible to handle CGI like Toy Story (the first one!) let alone Avatar in real time. I think the next Xbox and next PS3 are going to be relatively modest jumps in graphical fidelity compared to how it was last generation (good news for Nintendo as the Wii U won't nearly be as outgunned in the technical department as how the Wii was in this generation vs the 360/PS3).
I do think that the improved AI mentioned is much more likely and more economical, although that is still quite a lot of processing power to do it such a thing on a individual basis. Perhaps more groups of characters will act differently in situations or such.
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