In 1997, we had a windows 95 PC, 133 Mhz pentium processor, 48Mb of RAM, a 2 gig HDD, no soundcard or onboard sound (We added a decent soundcard later), not sure about the rest.
It cost us £1300, which i think was about $2600 back then, maybe more. Now, though, you'd have to pay someone to take it off you.
last december (2007) we got a £1000 PC. 2.4Ghz quad core processor (2.4 x 4 instructions at once = about 9.6Ghz of power), Nvidia geforce 8800GT (obsolete by 2 generations now), 2 x 640Gb raid 1 HDDs, 4 gig of ram, and even that's obsolete now.
I think when they've got graphics to a level where they can't get any better, they'll target 2 other areas - sound and AI. Realistic speech synthesis that would render voice actors obsolete, and realistic NPC behaviour, with more focus on the NPCs decision making and less on things being scripted.