The trailer for Half Life 2 from E3 is so beautiful it's humbling. The download is 500 megs of Quicktime, but worth it.
Facial muscle modelling allows them to do dynamic expressions and lip-sync, in-game and in realtime. Physics modelling not only gives each object mass and inertia, but also complex surfaces to tumble against and flexible shapes to bend. It's harder to judge the AI, but if what they say in the voiceover is true it's pretty amazing. It's like cutting edge movie CGI five years ago, but realtime on your PC.
All this technology will make for a beautifully immersive experience. I hope the story will match - not much in the trailer, but the modelling of the locations was so beautiful I'm willing to bet they've got a good backstory.
Between Half Life 2, Doom 3, and Deus Ex: Invisible War it's going to be a good year for first person shooters.