Siggraph 1994 - Cel Animated Characters Composited over Rendered Backgrounds
Disney, Pacific Data Images, and the Cartoon Network all showed examples of cel-animated characters over rendered backgrounds. These demos were far more convincing than any of the computer rendered characters, with the exception of extremely stylized characters such as Scuba Dog, and Moxy.
Traditional cel animation works very well on top of slightly surreal but photo-real rendered environments. Cel animation seems to work better than computer generated characters, and better than video characters as well. Cel animation suits the unreality of a computer generated environment, but video characters look dropped in and out of place. For the most part, computer generated characters are just pretending - even the best look stiff and unnatural. Abstract or stylized creatures, monsters, and robots work well, but that's about it.
Cel animated characters in fully rendered 3D backdrops are quickly accepted by the audience if the 3D objects have mass and if the characters appear to be able to touch their environment. Shadows the characters cast onto the background create the illusion the quickest, and unnatural lighting effects kill the illusion immediately.
Disney was showing Aladdin's magic carpet 3D virtual reality game, driven by a Silicon Graphics Reality Engine. The user straddles a motor-bike styled console and wears the goggles. As users fly the carpet through the rendered city, they encounter characters from the movie. The characters are cel animated and composited into the VR landscape, and are convincing as characters to be interacted with.