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.

We must remember, we are barely into what next-gen contains, so there are still 3-5 years of advancements on what all will be thought up, and done within the next few years.

The advantage of the 360/PS3, is that whatever these advances are, the systems are far better suited to take advantage of any enhancments in lighting, polygon counts, AI scripting, physics, kenetics, ect, ect ect.

Outside of that, let me ask you. Could Oblivion handle Radiant AI that Oblivion has?

Bethsada said that it was impossible on last-gen consoles/PCs due to the immense ammount of data needed to compute dozens of characters routines while still locking a solid framerate. If you haven't played Oblivion, you should and note the routines of the NPCs, as they are much better than any other game's AI, atleast in the fact their routines are much more varied than most any other game.

Graphics are a big part, yes, but graphics just aren't entirely there for "OMG, Graphics!" Dynamic lighting is a HUGE part of many next-gen games like Gears of War, Call of Duty 4, ect. Dynamic lighting isn't something thats easy to create, as the processor and GPU have to process lighting conditions based on the camera, items altering the lighting, ect, ect, ect. This takes up huge processor/GPU space. Dynamic lighting is amazing when it's used as a more immersive experience for games such as Condemned, and many other next-gen horror games.

For those saying "The Wii can do X and Y games like Dead Rising, ect", then why aren't these games that supposedly can be done on Wii (Lair, Oblivion, GTAIV, ect) being put on the fastest selling console rather than the more powerful one? After all, if the devs can do it with the Wii, it'd be very profitable for them. But they're not. There are reasons for that.

 Yahh LAir on Wii, LMFAO.

 For the final paragraph, those games only prove that those games aren't being made for the Wii, not that they can't be made for the Wii. And of course there is the fact that developers were dismissing the Wii until it started selling so fast.

 This doesn't mean the Wii can handle those games. It just means you haven't proven it can't handle them. 

Both the 360 and PS3 have pretty weak cpu's when it comes to Physics. We've seen developers talk about this a few times now (most notably at the GDC). AI has always been hindered by the development team. If your AI is too good, then your AI characters easily kill the humans. So they purposely dumb it down.

I'd figure that currently the CPU's in the 360 and PS3 aren't being used for much other then to run the gui's for the system. They might be closer to figuring out better uses on the 360's cpu by now but the PS3's is still mostly unchartered.

Let me expand a bit first before other people jump all over me, both the 360 and PS3 have faster clocked cpu's then the Wii so it is possible to scale some physics applications with the cpu speed.  These 2 cpu's are quite different beasts though, the 360 cpu is like 3 old school cacheless celerons stuck together clocked at 3ghz.  The PS3's cpu is a highly refined server cpu that was designed for doing simple calculations all day.  Neither were designed with physics in mind hence the reason they scale with their clock.

Why are there guys saying the wii can do all that? Can the wii run cryengine2 or UE3 if they lower the number of polygons in the models? why is there a physics card (Agei physics card called PhysX), if physics don’t eat processing power? Why are the most powerful computers in the world physics simulators if physics are so easy to process?  Why not even PC games have really good AI if its so easy to make and only ram limits it? Can tree search, neural network and FuSM aimed for the next-gen run on single core? If so the next-gen thing is just a scam, heck ill go pick my SNES and try to run the HAvok 4.0 or the PhysX engine on it and throw some strategic analytic entity in it...... the wii is a gamecube whit a wiimote controller, is like selling a PS2 whit a wiimote, but the ps2 would sell more of course.

 The wii can do AI but not the kind next-gen games are is aiming at, because it would drop the frame rate to the floor, even if they had only the landscape on screen.

I can do a FSM (finite state machines) even on an 8bit processor, but not the kind Next-gen consoles will do, god the wii not even multicored. This next-gen thing is only starting, and the competition between the Xbox 360 and the PS3 will make the games become something unseen before. 

Wii is nice, I’ll buy one for may niece because she is 4 years old, but i have played games since the 2600, i cant go back whit the wii, is like going back to VHS after seen a DVD.

 DarkD i apologize for saying that the 10-20% thing was BS but i thought you where talking about processors in general, and like the guy in the article says there is a 95% output in most. I didn’t put the links because i often don’t have time for that.

I'll tell you one thing the horsepower is for, making games cost so much, that Epic is raking in money with licensind out the Unreal 3 engine.

Sony showed devs that the Cell can perform advanced forms of branching. This will allow devs to create some great A.I. for our cannon fodder.

More objects because of additional processing power.

 And some analysis of the CPUs indicate that the Xenon still has better raw power for AI, even if not that much.

 You know, talk is cheap, and it's going to be for at least until this holiday season, or more likely until a couple years from now.