Improvements in physics are definitely possible with better processors, especially Cell.
Improvements in AI will not occur at all. Cell is especially poorly suited to programming AI.
Improvements in graphics will be impressive (mainly attributed to GPU improvement rather than CPU. This not only allows for things to look prettier, but for more objects and more complex game world (see dead rising)
Basically, these three things are what everyone thinks will be improved by more processing power. Only two of them well. The (IMO) most important one, will not be improved upon by X360 and PS3, as their processors are basically designed to be good at physics and graphics type problems, at the expense of AI type problems.
Of course, the problem with AI is not lack of processing power but lack of knowledge for designing good heuristics.
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