While the Xenos is an impressive piece of technology(especially as it was designed for a $400 game console), I think AMD will have trouble keeping up if Nvidia really releases the G92 in Q4 2007.
The G9x is only a refresh though and the R700 is a copletely new architecture with multi-core support which would allow more modular solution.
So theoretically if the G9x is significantly faster than the R6xx then they just change their target allocation of cores/card.
If they can move to a more modular solution where 1-2 R700 core is the mid range and 2-4+ is the high end then they've got the ideal solution from a production perspective.
An interesting aspect of that type of design is that then an NVIO style external I/O chip makes sense because each core doesn't need RAMDACs and TMDS if you have them in multiple clusters.