This may have been posted before, but the uncanny valley has pretty much already been passed. Watch this video and tell me what you think.
http://www.youtube.com/watch?v=bLiX5d3rC6o
Next gen games with this level of animation and realism is the holy grail, to me, as far as getting people to really care about the characters on screen, because we are now making characters that look almost identical to the real thing, and most important of all the character in no longer stuck in the uncanny valley. She appears to have real emotions and facial expressions instead of giving off that freeky robot vibe that pretty much every other human/avatar tends to do in games that we currently play.
Graphics like these, put together with top notch storytelling could finally bring about David Jaffe's dream of having a game that can make you cry like a movie can.
And from what I understand this type of technology has already been used in a few games like GTA4. But in order to get the lifelike visuals displayed in the video above we would need another graphical hardware leap like we did from the Xbox to the Xbox 360
The only problem I see is the Wii. Because of the direction the Wii has taken and the success they have acheived with it. It's pretty much understood that the next Wii will be pretty much the same Wii we have today but with the ability to output in HD.
If MS and Sony follow Nintendo's lead, upping their graphics capability will cease to be of any importance like it has been in all the gens leading up to this one.
After seeing developers finally conquer the uncanny valley, It blows my mind when people say that graphics have reached the point of diminishing returns. We are on the cusp of having actual lifelike graphics if Sony and MS continue in the tradition of putting out bleeding edge hardware whenever they put out their next gen consoles.
Their may come a day when diminishing returns makes it so that the graphical differences are so small between old gen and next gen that it is pointless putting in the more expensive hardware. But that day has not come yet and I don't see it coming any time soon. At least not in the next 2 hardware generations.