Raytracing is a method of generating a computer image by tracing a ray of light through an image plane. The whole process is similar to how light bounces off objects in nature, determining the color, sheen, luminosity, etc. Whereas other methods of creating graphics have to generate special effects, shadows, bloom, and other popular lighting techniques are all occur as a natural product of raytracing. The problem is that raytracing is very resource intensive, making it great for pre-rendered applications, not-so-great for on-the-fly applications like games. According to Intel's Michael Vollmer, that's a fact that could change sooner than we think.
We keep in touch with companies all over the world - I dare say that in two to three years time we will see something. There already are some individual approaches, especially in the science sector, which show that Raytracing algorithms are scaling very well with the numbers of cores. But the migration to a new programming technology takes years; Raytracing is still in an early stage
We've already seen crude attempts at raytracing Quake 4, with pretty spectacular results. Those of you wondering where graphics could go from here now have your answer. Raytraced games in 2 to 3 years, says Intel [PCGH]