For hardware tessllation I'm guessing?
No, you don't get my question - what exactly should the engine use hardware tesselation for?
As in, what is in Crysis 2 that would benefit from tesselation, especially at the relatively low quality that the X360 hardware can deal with? The most reasonable uses would be large open terrain, or interactive water, but none of these seem to be abundant in New York City.
Correct me if I'm wrong but doesn't hardware tessellation allow you to do away with Normal Maps and implement a level of detail directly on the GPU allowing very detailed models with high poligons instead of the low poly used today with normal maps?
No, tesselation is just a tool: it takes a simple description of a surface and generates a polygonal mesh from it, possibly taking several parameters like curvature, view distance etc. into account. What you use tesselation for is another question.
It is possible to tesselate a surface to such a degree that every polygon is as small or smaller then a pixel on the final image. In that case the detail's enough so that you won't need normal mapping. But it's a very rare case even if offline rendering, and current GPU hardware's efficiency would be completely ruined by such polygon counts.
But tesselation makes sense for many other possible reasons, like automatic LOD for terrain or water, smooth curved surfaces and so on.
I believe Id Software is working on a hardware tessellation solution for DX11 enabled GPUs, maybe Id Tech 5 will implement HT, not sure if the consoles have the right hardware but mabye the 360's GPU will have some functionality. Does anyone know?
Id Software is currently working on a virtual texturing engine; their next engine's feature set is far from being set in stone yet. They are looking into rendering using sparse voxel octrees, which is something very different from tesselation; but depending on the direction that next gen graphics hardware is going to follow, they may end up abandoning the voxel research.