The Tim Sweeney, Part 3 on TG Daily (thanks BeyondUnreal) concludes this multi-part Q&A with the Epic CEO. This installment looks at the future of the Unreal engine, discussing plans for version 3.5 and 4.0 of engine, further confirming the dominance of console considerations at this point, saying:

The Unreal engine is really tied to a console cycle. We will continue to improve Unreal Engine 3 and add significant new features through the end of this console cycle. So, it is normal to expect that we will add new stuff in 2011 and 2012. We're shipping Gears of War now; we're just showing the next bunch of major tech upgrades such as soft-body physics, destructible environments and crowds. There is a long life ahead for Unreal Engine 3. Version 4 will exclusively target the next console generation, Microsoft's successor for the Xbox 360, Sony's successor for the Playstation 3 - and if Nintendo ships a machine with similar hardware specs, then that also. PCs will follow after that.

Also, we continuously work on transitions, when we go through large portions of the engine. We completely throw out parts and create large subsystems from the ground up, while we are reusing some things that are still valid.