Update: Valve has posted a note regarding the Heavy video on its official site, explaining that the animation seen in the video is indeed real-time, in-engine output. "By leveraging the rapid pace of advancement in PC graphics, videogames can now match and actually surpass the facial animation used in feature film and broadcast television production," reads the update. "By running entirely on the GPU of the videocard, the facial animation not only looks dramatically better, but frees up the CPU to perform other tasks like physics or AI." As with all of Valve's technology improvements for its games, the new animation tech will be added to the Source SDK for all licensees.
I see the picture of the Medic "charging" the Heavy Weapons guy and I'm really hoping beyond all hope that when the Medic talks, John DeLancie's voice comes out. :(