Certain games have already reached photo-realism. Just take a look at Crysis for the PC. The only problem I have with photo-realistic games at this point is that the animation can be somewhat robotic. When the realistic looking people turn while running, for example, they tend to rotate on their feet unrealistically, move in sporadic, unnatural ways, etc. The next major programming hurdle for the graphics intensive games will be creating human models that don't look plastic and that animate realistically.
A great example would be the new Madden games. The players and stadiums look very close to photo-realistic in the screenshots, but the player animation during gameplay makes it easily discernable from a real-life game. Once programmers figure out how to animate characters realistically, many games will look more like reality.
The thing is, photo-realistic is not the only factor in gaming. Sometimes it's nice to play a game in a surreal environment (like that created in SMG or No More Heroes) to escape from reality. IMO, so-called 'cartoonish' graphics can actually be more artistic than photo-realistic graphics. What I mean is, creating a world that looks like reality does not require as much creativity as creating a world that does not look like what we see every day. To create these 'cartoonish' or 'artistic' worlds requires inventing a unique art style and creating new sights from the mind, rather than just duplicating reality.
Photo-realistic games have their place, but so do the more artistic non photo realistic games- it really comes down to taste. I believe that no matter how powerful the gaming hardware is, both types of games will still be made and enjoyed. I never want to see a world where 'photo realistic' is the only standard for games. Where's the variety and creativity in that?
On Topic: I don't think it will change the ratings. Gears and Resistance are very near photo-realistic, while Manhunt 2 is PS2 looking graphics, yet Manhunt 2 is the game that got an AO rating. It really comes down to what the programmers do with the game, not the realism of the graphics.
