tesselation is the act of figureing out how to represent a shape in using triangles :)its required for higher order surfices live nurbs and subdivs, but can also help with lod, when you re-tesselate the mesh to a lower resolution
if you think the current games look good you should check ot the raytracing demos that are beeing run on amd cards..
just to give you an idea, the trailers for the transformers movie where rendered in real time on a 2900 xt and ~25 fps.. on the r770 chips the scenes are renderd at 60fps with anti aliasing.. gpus are incredebly powerful

i whish there where more attention to direct x and gpgpu computing from channel 9 :/ that accelerator project was awsome..