You may have heard about Half-Life 2. Even CNN Money has reported on it, and how it, together with Doom 3, could save the PC games market.
Shacknews had a good preview that described the Half-Life 2 action sequences that were shown to the press in more detail. If you read between the lines, it sounds like there might be a lot of emergent character behavior.
From what I can tell, it sounds like Valve has been doing a great job. They seem to be focussing heavily on character display, animation and behavior. Zelda: The Wind Waker takes a similar approach, although using a cartoon style instead of photorealism. It makes a lot of sense: so much can be conveyed through characters - and so much can be destroyed if they don't look and act right. I'm surprised the overall technology level is not further ahead than it is. Perhaps Half-Life 2 will help.