TL;DR [Animation is Physics in action, and requires tight integration with physics systems to achieve realistic results in games. Substandard animation should be just as embarrassing and costly (in terms of sales lost) as substandard visuals. The technology exists (and has been used since 2004) to integrate Animation and Physics in games, and any modern 3D game that fails to integrate them should be viewed in the same light as a 3D game that fails to integrate polygons and textures.]

Animation is the final frontier for "Next Gen" games. We can already do "photo real" graphics, reproduce sound with perfect fidelity, simulate physics with millimeter precision, and AI is getting better all the time... but animations generally still look loose, floaty, generic, and weightless... it's a crime. For obvious biological reasons (about 80% of sensory input in humans is visual) the original 'selling point' in games was purely visual. Due to limitations in processing power and the static nature of print advertisements, that visual fidelity was purely static without taking animation into consideration. Greater processing power and increasing focus on "gameplay video' in advertisements made physically-base animation both possible and desirable. Once games started to go 3D you began to see a greater focus on physics... given a game that looked and sounded so much like reality, gamers expected things to act somewhat realistically as well.

But for some reason gamers are still content with animations that look like the result of a frantic second-year animation student's alcohol-fueled procrastination.

Mostly it's because good animation is a lot of work (which really means money). If you have the time and facilities, you can motion-capture (essentially 'film' an actor doing the motions and copy it exactly) all your animations... but you'd better be sure to mo-cap every possible animation ever because it's glaringly obvious when 97% of the animation is mo-cap and then you throw in a few hand-made animations... they just feel different... and it's jarring. You can also hand-animate everything, and if you've got a dozen really good animators who have access to quality video recorders, decent props, and padded floors you can get smooth, fluid animations that have the "real" feeling of mo-cap combined with the ability to create new animation as needed... and the ability to animate things that don't look or move like people do. But most game studios have one or two people who are decent animators (plus a few modelers and TD's who know how to animate) and these people maybe have their own cameras and a parking lot to record in, and get a lot of their 'references' from YouTube and stock animation sources.

But the purpose of game animation is to serve the needs of the game play or story... or both... and it's often overlooked.

The real problem is, unlike a film, in a game you can't know beforehand every single possible situation the system will need to have animated... and how fast, at what angle, and when viewed from which directions. There are so many variables, that you can't possibly animate for all of them. You simply can't have realistic and responsive animations unless you: 1 - Custom animate every possible situation (not gonna happen!) or you: 2 - integrate the animation and physics systems to respond to each other... which has been done quite successfully since DOOM 3 (at least... and possible earlier). DOOM 3 is best known for fully integrating the static (level) and active (character) lighting systems into one single system... which most professional 3D engines (except Valve's Source engine!) have done since. DOOM 3 also integrated the Physics and Animation systems the same way... which was awesome and led to some beautifully "massive" enemies that actually responded to the environment in real-time and realistic ways. In DOOM 3 when your rocket hit a demon's right shoulder, the animation system didn't just play a "right shoulder hit" animation (which is how it was [and still is, in most games] done previously)... no, in DOOM 3 the physics system calculated the 1: impact of the rocket itself, 2: the force of the explosion, and 3: the mass of the shoulder plus the mass of every part attached to it, then 4: altered the animations in real-time to account for it. The end result is small, weak enemies who are blown to bits by the rocket; bigger, tougher enemies who are spun around and knocked down by the impact, and massive, terrifying enemies who shrug it off... all based on real physics and NOT endless custom animations.

Try it yourself... open up DOOM 3's creature scripts and add another "0" to the hit points and mass of each of a standard pistol-wielding zombie's body parts... he'll go from a shower of gibs to merely being knocked down by rockets. Add another "0" to his HP and mass, and he'll merely "flinch" from a rocket hit. I screwed up a few monsters by making their feet and lower legs hugely massive in the scripts... the engine had trouble moving them, and they sometimes didn't fall down completely when dead, because the mass of their feet was greater than the rest of their body.

At the other end of the spectrum is Gamebryo games (Neverwinter Nights, Oblivion, Fallout 3/NewVegas, Skyrim) the AIs "float" just above (or under) the terrain on rough "navigation meshes"... and show no physics besides what's been specifically animated into them (which is none at all... the animations are physics-free in an attempt to make them "multi-purpose"). An AI in Gamebryo that falls 3 feet plays the same "landing from a fall" animation as it would if it had just fallen 30 feet (provided it doesn't simply die). This lack of physical fidelity is especially jarring in (the very common case of) melee combat... when you swing a sword and it cleaves right through a monster's body, but he just takes "1 hit" of damage... or when he waves his sword at  you, you see it miss but the system registers that you got hit... it's not a good thing. I should add here that after death the corpses in almost every game since Unreal Tournament popularized it will go into a physics-based "rag-doll" state where they flop around based solely on physical limits like joint-flexibility and limb weight... but very few games actually use this (readily available and already existent) information and integrate it into the animation system! It's all right there... you don't even need to add it, it's already been done so that the "rag-doll" look good when kicked around the landscape (and in most cases that's all it does!). The information is right there!... it's even hooked into the physics system for you! You just have to write an animation system that takes advantage of it... and that (apparently) is the hard part. The animation system is already set up so that the animation for "swinging my axe at you" can be blended seamlessly with the animations for "taking a step forward" and "shouting really loud"... and all these animations are actually mathematical rotations and displacement of 'bones'... so adding some more math is not asking for the moon here... math is what computers do!

Why is it so difficult to have the game notice that my sword hit the arm (it already does this... that's how it registers when and where I'm hitting the enemy to assign damage in the game)  and then use the preexisting rag-doll physics system to calculate how my hit on it's arm moves the rest of the body (exactly as it will a minute from now when I beat it's dead corpse in frustration) and simply use all this preexisting and easily calculated information to tell the animation system to blend "rag-doll movement calculated by the physics system" into the existing animation, which is itself a blend of the previously mentioned "Swing", "Step", and "Shout" animations that are already being blended in real time to animate the figure in front of me. And because I'm the only thing in the game world which causes these physics interactions, it's not like there will ever be enough of them to cripple the system.

Although it would be awesome if all animations were physics-based... so that skeleton warrior couldn't swing through a wall to hit me, or an orc charging down hill would be knocked off his feet when his arm and shoulder passed right through a tree trunk.

In a system with proper physics integration the feet of the AIs hit the ground at each step and when they do fall, you can see the effects of a 3 foot fall (slight flexing of the knees) and the very different effects of a 30 foot fall (slammed to the ground and sent sprawling). What if AIs in games actually touched the ground or responded to physics? What if that skeleton warrior was (realistically based on the physics of the situation) crushed to the ground when you hit him with an overhand smash with a heavy weapon?? What if being hit by a half-ton of armored horse moving at 30 MPH actually affected an enemy as it would in real life??? What if an AI took damage based on the hit location and momentum of a weapon, multiplied by "sharpness" factors and divided by "armor" factors with suitable multipliers for relative skill in the "sharp weapon" and "armor wearing" abilities???? What if you could accomplish all this "simply" (sadly, it's not actually "simple") by integrating the physics and animation systems in your game... oh wait, you can!

The Source Engine Mod "Mount and Blade" uses the mass, speed, sharpness, and direction of movement of the weapons in the game to determine hit location and damage. It's somewhat difficult to use at first... especially if you're accustomed to the "wave your sword in their general direction" type of combat. But after 15 minutes you get the hang of it, and after finishing the game it's a horrible let-down to go back to "regular" (and by "regular" we mean "stupidly unrealistic") melee (and ranged) combat in other games. Most people agree that Mount and Blade takes this to extremes... it's more of a medieval combat simulator than a "game"... and the simulation crowd is not made up of the 'average' gamer... but you can (and should) take advantage of physics and realistic combat ranges in your "non-simulation" games.

To use a current AAA game as an example, Battlefield 3's animation system is beautiful... when the AIs run, jump, fall, land, roll, get hit, and (most impressively) skid to a stop, they look real... not because of the number of polygons or resolution of the textures (and you can change those things at will), but because they took the time to make the animation system responsive to the physics of the situation. I honestly don't know if BF3 used the "make an animation for every possibility option, or the "make the animations part of the physics system" option... but it works... and it's got the best animation of any game I've played. At least some of the animation in BF3 is physics based, because the vehicles and soldiers do actually touch the ground. Sadly, when lying prone the animation/physics system uses a single point inside the AIs torso to determine what it's "touching"... which leads to characters buried waist-deep in walls and 'floating' on high points above uneven terrain... but it's a decent work-around to actually calculating the the position and possible contact points for every bone in the skeleton... which I'm sure the next generation (or two) of games will do.

BF3 even has melee combat, using knives... which have to actually hit the enemy's body to do damage, and in most cases do not cause an "instant kill" effect (which most games implement because otherwise taking a knife to an assault-rifle fight is terminally stupid). If you do manage to hit an enemy in the back the game plays a short (and nicely varied, depending on angles and positions of the combatants) animation of your soldier killing (and stealing the dog tags of) the enemy... but it is by no means "instant" and a friend can shoot (or knife!) and kill the enemy to interrupt this animation, thereby saving your life.

While DOOM 3 was a good (if primitive) first step, and Mount and Blade takes it to nearly unplayable extremes, there has to be a playable happy medium for animations and damages reacting "realistically" when integrated into a comprehensive physics system. And really, now that "Next Gen" games all have the capacity to show "photo real" (if they want, or nicely stylized if they're smart) graphics, perfectly life-like sound, complex and responsive physics simulations, reactive scripting, adaptive AI, and (increasingly) smooth multiple player interactions... animation is the only thing left that's still consistently less-than-realistic (ie: it quite often SUCKS) in current games.

If Id could integrate physics with animation in 2004, why isn't everyone doing it now? I mean, DOOM 3's other great advancement (integrated lighting) is now the de-facto standard (even if it's 'faked' with pre-baked radiosity maps and shadow mapping, it's still the visual standard)... why not good, physically-responsive animation (even if it's "faked" with comprehensive animation sets made by talented professionals)?