I was overjoyed when I read the article explaining that developer Naughty Dog went into super-crunch mode to bring about the stunning dynamic set pieces in Uncharted 2. Well, I wasn't happy that they went into crunch mode for months. It would have been fine with me if they had accomplished the feat while still spending time with their families. But I am glad they made the sacrifice for the sake of something cool and not another tiny improvement to the visuals.
The stuff they're doing is another step in an ongoing trend. Red Faction: Guerrilla brought us destructible environments. Half-Life 2: Episode 2 introduced a system that allowed large-scale structures like buildings and bridges to be destroyed or altered in various set-piece events. A few other games are experimenting with this sort of dynamic content.
In the old days, if you wanted to make huge sweeping changes to the environment you usually pushed the player through some sort of level change. (You were in the engine room. You press the button to turn the pumps on and got a loading screen. Then you find yourself in the flooded engine room. That sort of thing.) In some cases, the changes could be made during an in-game cutscene where the player couldn't control the camera or attempt to interact with the pre-scripted destruction. You can see this in the GTA series when you get a "blow up a building" type mission. You can only blow up very specific buildings at specific times, and it's usually just a model swap of the intact building for the wrecked one, with the replacement being hidden by particle effects and camera cuts.
For a long time, games - particularly "indoor shooter" type games - were built around a technology where special optimizations were done before release. A level would be run through a program that would work out which polygons would be visible from what positions. No matter where you put your eyes, the game will have this optimized list of everything it needs to draw for you in that location. This optimization process sometimes took hours. A great deal of work was done ahead of time so that your modest machine at home wouldn't have to work so hard when the time came to play the game. This was a great system and it let us get larger, more detailed levels on the same hardware.
But the price was that for this system to work, levels had to be rigid, fixed places. Sure, you could open a door here or blow open a wall there, but the more stuff the player could change the less effective the optimizations were. In the end you'd have to pay for that additional flexibility somewhere else in the form of smaller levels, less detailed environments, or (perish the thought) lower framerates.