To be honest the whole virtual reality thing is pretty dependant on photorealistic graphics as much as innovative control systems. Virtual reality is all about creating a world that is virtually real as the name suggests and I guess the feeling of reality is conveyed by what you see as well as how you interact. Other stuff like feedback from the world around (be it force, temperature, smell, audio etc.) would also improve the level of realism.
I feel controllers like that on the Wii go some way to adding a level of realism to controls (in that you swing a racket, golf club, sword etc. in a similar fashion to how you would in reality) but naturally the graphical realism isn't there and I guess the illusion is always broken when watching graphics (no matter how good they are) on a 2D screen.
That said, is VR the way to go or are developments which improve accessability and fun levels of games (such as the Wii) a better approach. Nintendo have moved completely away from visual realism but have moved towards a system that looks to recreate reality in terms of interaction. I guess people are happy (having grown up with cartoons, comics etc.) to accept non realistic graphical interpretations, but less happy to learn non intuitive controls systems like joypads which replace everyday actions with pressing a pad or pushing a stick and pressing a combination of buttons. Video game graphics have never been the barrier (as we all watch cartoons and video game graphics are no less alien than them) but the control systems have meaning that new gamers (and in some cases people who have grown up with games) get turned off by 10 button joypads with 2 sticks and a D-Pad! I'm sure flying an aircraft isn't much more complex than trying to play some games!
The bottom line is that if you have to think about a control or learn a set of controls in a game then they are not intuitive. When you play tennis in real life you don't have to read a manual to find out which button does a top spin, lob etc. it's all down to how you swing the racket and the angle of the racket head.
So in conclusion to my ramblings, Nintendo have indeed taken a large step towards a level of "virtual reality" and even though Virtual Tennis 3 on the PS3/360 may look amazing, it's nothing like playing real tennis. In contrast, Nintendo's Wii Sports Tennis game is basic in many respects (basic graphics, you don't even move your player) but is a far more realistic interpretation of Tennis than VT3 or any other tennis game that has come before. It captures part of the fun of real tennis and gives an insight of how good the next version of Mario Tennis (which would use the nunchuk to control the player) could be on the Wii. I'd say that the Wii is currently the closest thing we can buy to this "Holy Grail" of VR. In my view it is the control and physical interaction side of things that's the hardest bit to get right as graphics are not that far off. Nintendo really seem to be on the right track with the Wiimote and hopefully they will go on to develop this side of gaming even further.