http://www.gamesfirst.com/index.php?id=1132
Many people (myself included) have questioned whether or not the 360 can handle the next gen due to it's limited disc size. However this artcle shends some light on the subject and the points it makes are rather suprising.
Now anyone who's followed the Xbox knows that niether the original or the 360 have access to the full 9GB because security features in the disc (The Data is layed out in a specific way) it's more like 6.5-7GB. Still that's a lot of space and if nessecary MS can always update the spec.
This also bodes for the Revolution which will also be using standard sized discs (according to the info avilable at the time).
What's really interesting, is that Sony is a supporter of claim that the Next-gen requires larger discs, but if you start to look at Sony's history you start to understand why.
Sony doesn't like compression, or alleast seems to be habitually at odds with it. The PS2 has terrible compression (see: RE4 audio) and it's games often take up considerably more space then they're xbox counter parts. Bloodrayne 2 is almost 2 GB bigger on the PS2.
Sony's thoughs on compression are also clear in the next gen of movie where Sony will be sticking to the MPEG2 codec. The Blu-Ray standard supports VC-1 and H.264 (aka AVC)
The bottom line seems to be that if you've got the power and memory compression can overcome major restraints. That is if you're willing to use the best compression.