I think it's quite obvious this is simply a matter of performance.
I mean, if Crytek could release the engine looking as good as it does in the first image without reducing everyone's machines to 5 frames per minute, don't you think they would?
There's no way Crytek had machines capable of running the game smoothly several years ago (even my top-spec PC has trouble at 'Very High'), so I'm guessing a lot of promotional footage was sped up or something like Sony did with the Killzone 2 demo. I doubt they just pre-rendered a load of shit to fool everyone, and instead just overestimated how powerful your average computer would be in late 2007.
I'm fairly certain Crytek said in an interview I read that as hardware progresses they will 'unlock' new levels of detail in the options.
I'm assuming this means that a lot of the extra detail is actually already there, but the console commands/settings aren't linked to anything in the interface. As a lot of people already know, the difference between 'High' and 'Very High' is pretty much just a bunch of console commands and numbers (hence why you can use 'Very High' on XP), so the chances are there're more. It also looks like a lot of the 'Very High' console commands can go much higher if you mess with them manually. At the cost of extreme performance loss, of course.
Don't forget Crytek also did this with Far Cry, introducing stuff like HDR long after the original release.
It seems pretty simple to me: no hardware can run the engine at its absolute maximum potential. It's a matter of Crytek trying to get it as good as possible with what hardware people actually have (imagine if a top-of-the-line rig couldn't run it on 'Very High' at even 5 fps), which they've done very well.
