The public first got a glimpse of Unreal Engine 3 at last year's Game Developers Conference. But back then, the technology was still in its infancy, meaning the presenters from Epic Games only showed off tightly scripted demos with very little interaction in them.

What a difference a year makes.

Epic is back at GDC this year showing the latest and newest features of the engine, along with whole-new tech demos that can only be described as jaw-dropping. Epic vice president Mark Rein told us that the next-generation of PC and console hardware dovetail very nicely with Unreal Engine 3 and that it takes full advantage of what those platforms will have to offer. If what was on display was any indication, the future of gaming looks very good indeed.

Unfortunately, Epic isn't releasing video of the demos yet. The first demo shown involved a squad of futuristic, sci-fi soldiers patrolling the ruins of a bombed-out town or village. The town is almost medieval in nature, as the buildings are made of stone and covered in ivy. Suddenly, the squad leader stops the patrol, sensing something is wrong. As if on cue, aliens open fire from the upper floors of several buildings, and the troops scatter. It's at this point those present realized with some awe they were seeing actual live gameplay, as the demonstrator was controlling one of the soldiers as he fired his rifle at the aliens.

The second demo showed off one of the newly announced features of Unreal Engine 3: seamless level loading. Basically, the engine is capable of loading several levels simultaneously, so the game will analyze where a player is going and load the next level ahead of time. By the time you reach the new level, it will already be in memory. This means that after the initial load to start a game, players will not experience any level loading at all. To demonstrate this, Epic showed a futuristic dune buggy driving through the streets of what looked like a gritty European city. (If anything, it looked very much like a far more detailed version of Half-Life 2's City 17.) The buggy careened through the empty streets and then cut across a park. And it did so seamlessly. This means that in addition to no level loads, the game will be capable of creating huge, Grand Theft Auto-like worlds to explore. To finish the buggy demo, the camera pulled back to reveal a glimpse of a stunning and crowded cityscape, along with the glistening waters of a huge bay.

The next parts of the demonstration showed off technology from last year, but for the developers in the room, it was important. Epic is working very hard to make Unreal Engine 3 as developer-friendly as possible, because the company recognizes that the costs to make next-generation games will be considerable. One way to reduce development costs is to give game makers easy-to-use and powerful tools. As such, Unreal Engine 3 comes with very developer-friendly editing tools, such as Kismet, which is a visual script editor that gives artists the ability to create intricate and complex scripted actions with relative ease. Another comparison between Unreal Engine 3 and earlier versions of the Unreal Engine is that Unreal Engine 2 required programmers to write 90 pecent of the shaders used in a game, whereas Unreal Engine 3 will only require 5 percent of shader code to actually be written by programmers. The other 95 percent will already be incorporated in the engine, where artists can take full advantage of it.

Physics are also going to be a huge feature of Unreal Engine 3, especially as new technologies, such as multicore CPUs and dedicated physics processors, emerge on the next-generation of consoles and PCs. The sheer amount of computing power will allow for far more interaction with the environment. To demonstrate this, Epic showed an Unreal Engine 3 demo in which boulders rolled down a hill. In Unreal Tournament 2003, the engine could calculate and display about 10 boulders rolling down a hill at a time. Unreal Tournament 2004 increased that number to about 20. Both of those combined are nowhere close to the number of physical objects that Unreal Engine 3 can handle at the same time. To illustrate this, an avalanche of more than 600 boulders rolled down the hill, each reacting realistically to collisions, and each casting its own shadow.

So when can we expect Unreal Engine 3 to begin appearing in games? While Rein couldn't speak for their third-party partners, he said he expects the first Epic PC game based on the engine to ship sometime early next year.

An even more pressing question is the kind of hardware you will require to run Unreal Engine 3 games. Next-generation consoles will have no problems with Unreal Engine 3 games, but PC gamers don't need to worry, according to Rein. He said that a video card based on an Nvidia 6600GT, the kind currently available for around $250, will be able to handle games based on the engine easily. However, by the time any games based on Unreal Engine 3 ship next year, those cards will have dropped in price considerably, meaning that PC gamers won't have to drop big bucks on upgrades.

Epic also acknowledged that there are already several third-party projects under way using Unreal Engine 3, including at least one online role-playing game.

[UPDATE] - Watch new movies of Unreal Engine 3.0 in action, below, in an Intel demo known as "RoboHordes."