Graphics will always improve. Even movies with ray-traced special effects rendered by supercomputers have room for improvement. As time goes on we'll continue to discover new methods for making things more realistic as well. Even the most realistic games still can be discerned as a game. Not only that, but I think we'll see a move to where the graphics, physics, and audio systems all interact in a much more organic manner. Look at games where there's scripted events such as in Call of Duty 4 where there's a part where you have to snipe and its windy, which impacts your bullet, now think of that being integral to the game and not a scripted sequence. At some point, we'll probably see games that utilize weather modeling that is currently done on supercomputers.
You people hoping that graphics won't keep center stage aren't going to be happy with how things are moving in the getting-near future (but should be very happy longer term), as things shift back towards software rendering. Ray tracing for instance will have major upsides, but its going to need a lot of processing power, which means graphics will likely end up with the priority of computing power for some time to come. However, software rendering should help push for physics and audio, and other things to become integral to the overall game engine.