It's not even the 360's limitations, there are games that have more different models on screen. It's Bioware's crappy engine and/or their insistence to make really high res models. What's the point of having super high quality when you can only have three different kinds on the screen at the same time. Make some compromises, the PCs have to look great, the other models can look a bit crappier if you can have more variety.
It's not the models that take up the most space, it's the conversations and everything associated with them. From the forums here:
Another developer here says that all possible conversations in an area must be loaded into memory beforehand, which means that models have to hit a particular memory budget.
You can argue that Bioware don't need to put in cinematic conversations, but that means following the Fallout 3 style of conversation where everyone you talk to is a mannequin rooted to one spot until you finish talking to them.