I agree with some others here that the law of diminishing returns is a factor in graphics improvement. Visual technology will continue to improve, but investment will probably start to move in other directions. Look at 2-D graphics or game audio today for an analogy -- can they really get much better than they are? Game graphics certainly have come a long way -- compare Night Driver to Pole Position to Gran Turismo's recent iterations. But how much further can they go? Cost-effective yet meaningful 3-D improvement will eventually start to max out, and I would wager that will happen before anyone pulls off real-time ray-tracing at 1080p. I would also point out that, right now, EVERY in-game approximation of a human being still looks weirdly stiff and unrealistic running around -- stopping on a dime, turning in place, etc.; cut-scenes aside, humans look bad in games. This may never change because more realistic animation wouldn't necessarily be more fun -- in fact, more realistic walking/running/shooting-big-gun physics would likely weaken and dilute player control. Given that, I don't think true realism is what anyone WANTS, regardless of whether the technology can deliver it someday. I think game publishers and developers are also running up against a genuine cost barrier in terms of how much "reality" one can afford to construct. The ability afforded by increased processing power to use procedural textures (infinitely scalable, reduced "hand-painting" required) will help in this area, but it still takes human time to design and model in-game worlds and objects. And the cost-reduction tricks used in film production (facades, matte paintings) are hard to get away with in a game. If game production costs start to approach movie production costs (consider the effort put into CG special effects, which so far is always some years ahead of what a console can do in real-time) but the sales base hasn't grown to accommodate that kind of investment, something will have to give. I suspect that physics, AI, and control will begin to dominate the technology focus as time goes on. All of the current gen machines have foreseeable room to improve in these areas. Graphics will still continue to improve next generation, but the Wii may be establishing that it's okay to let technology lag behind the PC a bit for cost reasons in this area. Processing power and innovative hardware/algorithms may become more critical than pixel-pushing. Who knows, but it will be fun to see what happens!

But how far can graphics advance? Artificial visuals can only be as good as reality and when a game perfects 100% photo-realism then graphics can no longer advance. I was suspecting that this would be achieved at the end of the 8th generation, but with games like 'crisis' and 'gears of war' already coming very close to this mark, it may happen sooner.

- Sony & Microsoft clearly imitate motion control tech in the way Nintendo has made it work on Wii

Definitely. I think that every next-generation console will have controllers with those capabilities. 

 -  Sony & Microsoft try to invent a new form of casual engrossing disruptive tech that is compatabile with traditional games

Possible. With the massive sales of the Wii it's possible that next-gen systems will try to dominate the entire market instead of just a certain group.  Based on the sales of Gears of War I would say about 6-7 million of the 360 users are at least slightly serious 14-25 year-old male gamers who will buy games like Gears of War.  Most of the rest are probably under 14 or only play sports games.  For the PS3 I think almost all of them have jobs and paid for the PS3 with their own money since I don't see a lot of parents buying a $600 PS3 for the kids.  When I lived with my parents my dad made about $90,000 a year and spent about $300 on my gifts for Christmas and my birthday.  I would guess roughly 2.5 million of the PS3 owners are males between the ages of 16-30.  I would say at the moment that about 3-4 million of the Wii owners fall into the same category of the typical 360/PS3 users and the rest are casual gamers, female, under 14, or over 30.  I'm come up with this number based on the fact that Zelda has sold 3.22 million and Red Steel sold  pretty close to Resistance despite being complete garbage.   I searched the internet but couldn't find any exact statistics on age groups unfortunately.  I do see next-gen consoles going with Nintendo's strategy of trying to appeal to all groups instead of just one.   However, I don't see them breaking Nintendo's iron grip on the non-traditional market.

- Sony & Microsoft simply support 360 & PS3 much longer than Wii sees support, as Nintendo unveils it's newest console in 2011-2013 and Sony & Microsoft hope Nintendo has run out of ideas about market expansion   

I'm not sure.  I think when the price of the Wii is down to $100 or less Nintendo would be able to make money by releasing a system as powerful as the 360 for about the same price.  Who knows what strategy Microsoft or Sony will use then.

 - One or both companies leaves the industry

I can actually see this happening.  I do agree with you that Microsoft may have entered the console industry to prevent Sony from making the PS2 a central home entertainment system instead of the PC.  I remember seeing early pictures of the PS2 that showed it with a keyboard, mouse, and a monitor.  It looked almost exactly like a PC.  The Dreamcast actually had all of those features as well.  Games like Unreal Tournament and Quake III: Arena were designed for a keyboard and a mouse and everyone who played Phantasy Star Online had a keyboard.  I remember playing PSO with a controller in hand and a keyboard on my lap, good times.  Dreamcast only used those for gaming but Sony may have tried to have upgrades to the PS2 to make it more PC like.  Microsoft could have entered the market not for the primary purpose of making money, but to kill the Playstation brand.  Judging by the sales of the 360 versus the PS3 they may actually be pretty close.  Sony didn't make a huge profit off the PS2 and they've almost cancelled it out with the PS3.  If things continue the way they are they might just decide to leave the industry.  If that happens and Microsoft continues to lose money and gets crushed by the Wii they could give up as well.  After that I imagine we would see a new company rise up and try to compete agaisnt Nintendo just like Sega.  The next generation could be Nintendo versus an entirely new company that focuses only on games.  That's what Sega did with the Genesis.  However, it does look like Microsoft will do okay agaisnt the Wii at this point.  The question is, will they make a profit?

- Sony & Microsoft fail to invent disruptive or imitiation technology, and continue with graphical and media updates

I think the success of the 360 shows that there is enough of a market for state-of-the-art graphics.  I also think the sales of the 360 will pick up a lot when its price drops to $300 and they start releasing their really big games.  A lot of people may go the Wii60 route.  It's already doing well agaisnt the Wii.  However, it's possible the Wii could release enough games designed to appeal to 360's target audience to beat them in that area as well.  I think the 360's primary audience would enjoy Metroid Prime 3, Smash Bros., Mario Galaxy,  Battalion Wars 2, Disaster: Day of Crisis, Fire Emblem: Goddess of Dawn,  Manhunt 2, Guitar Hero III, NiGHTS: Journey of Dreams,  No More Heroes, Project H.A.M.M.E.R.,  Resident Evil: Umbrella Chronicles, Soul Calibur Legends, Sadness, etc.  If Nintendo says that they're not interested in competing for the same market as the other consoles then they're lieing.  I assure you that just like any company they want to bury the other consoles in every single way possible if they can.  

I really think it's impossible to guess what will happen at this point.  The butterfly effect is probably the biggest factor in determining what happens next generation.  We can be pretty certain that this generation Nintendo will sell the best, Microsoft second, and PS3 third, but only time will tell what other things happen.

Speaking of World of Warcraft and Everquest 2, it's also interesting to note that WoW has much better gameplay than EQ2 does (this is from personal experience of playing both). Some people of course won't agree, but I think the numbers are indicative of this as well. So we have a similarity between two big MMO releases and the current console generation. On the one hand, we have an MMO that sacrificed visual realism to promote artistic style and gameplay, on the other an MMO that was considered to have had some of the best graphics of that time, which incidently made the game almost unplayable if you tried to run it with all the settings enabled (on a brand new high end computer at the time).

In the end, gameplay won out and the direction the EQ2 developers were headed alienated a lot of people (including me).  Graphics are nice as long as the gameplay backs them up, instead of being sacrificed in the process.

I heavily disagree that nintendo will release its next console first. They always hold back and look at what others do and then unveil their newest piece of technology. They never unveil something early on for fear of it getting ripped off. It's happend in the past and its happend again.

 Yeah that guy was me

However, i did not mind about PS3's price i just thought that the whole reaction was funny

I doubt this will be the last generation of graphical improvements. First of all, by the next generation HD TV penetration will have increased greatly, especially, since in 5-8 years time, most TV makers will have probably stopped selling anything below 720p. Also with the advent of hologrpahic disks, which I think was mentioned before, and things like this technology, http://en.wikipedia.org/wiki/Ultra_High_Definition_Video, video games will get ever close to realism. Also saying movies are the best form of realism, that's not necessarily true, if anyone hasn't seen the movie Stealth, it involves a fururistic robot aeroplane. I remember seeing a Blu-Ray review of it, and it basically said that it's not really that better than the DVD one because it contained a fair amount of CGI, which when the movies was put into 1080p, totally stood out, becuase although film has been recorded at 1080p for years, the CGI wasn't 1080p! Also my dad (who works at R & D for an electronics company), said that this new format (Ultra High Definition), has such high resolution, that to get the best viewing out of it, it has to fill your eyesight (so a really big screen), and the resolution is such, that there isn't that much difference with watching a movie on it, and looking out a window! So if this technology eventually comes into people homes (at least 10 years away really), then you can guarantee that someone will take advantage of it. Ie PS3 and 1080p, and it seems the xBox 360 Elite may be heading that way aswell.

That is quality, but then there is also quantity. You can *always* throw more polys at the display - which will have more and more pixels to show detail on.

So take Gears of War - then multiple the visible/active enemies by 100. Then by 10,000. Then by a million.

When the number of realistic looking characters you can render (at 100fps), gets close to the total number of pixels in the display device - THEN I think you are close to maxxed out ;)

Then there is always 3D/holographic display, which should pose some interesting issues...

 No we need holodecks for that