I kind of think....um....that Blue Dragon looks better and is more artistically consistent than LO too. So, yeah, it's more technically shitty, but I guess that is the price you pay for out of this world lighting. Plus, LO has that annoying problem of frame dropping in cutscenes when the screen goes into PiP (which is actually really neat).
The one thing I find pretty dismal about LO is the character faces. Between the hair and the skin shader, I find something like Mass Effect to have much more believable characters. In an RPG, I think that's fairly important. In this regard, MGS4 looks very far ahead of any other console game in terms of facial animation and believability. The Meryl model really impresses me for some reason.
So, with FFXIII, I am expecting big things. I expect technical proficiency on a level Square demonstrated on PS1 and PS2 combined with MGS4 level cutscenes and character modeling. I have very high hopes for the game. Now that it will actually be profitable, I think they should spare no expense.
edit: wrt: Crystal Tools, I'm not sure they actually MAKE enough games (particularly next-gen ones) to warrant developing a next-gen engine. Square Enix's output is often outsourced, and it's doubtful that those games would ever use Crystal Tools. To me it sounds like they spent millions on an expensive engine for FFXIII, Versus, whatever else they were planning to shit out for FFXIII, and KH3. Which I'm sure would result in them making their money back on the engine's dev costs, but why?