"Proper" is a subjective term, and no, it isn't necessary. The only thing that's actually necessary for a 3D game is to have some form of meshing, some way to transform the mesh with the viewing angle, some way to project that to a 2D image, some way to draw that 2D image on the screen, and to be able to all that fast enough that the image responds to the player's inputs fast enough for him to play the game. Otherwise, this would be the first generation to have 3D games.
So is "terrible." I like the way KZ 2&3 look. The fact this thread even exists is proof that not everyone agrees with you that the sacrifices you have to make on the PS3 to get HDR lighting are always worth it, every time, in every game.
The problem is the PS3 isn't all that powerful. It isn't capable of doing every imaginable graphical technique simultaneously on an arbitrarily large mesh with arbitrarily high texture resolution. Even if you find some way of doing HDR, 4xAA, full 1080p, and 60 fps at the same time in a first-person shooter (four different things that I have all seen different people insist on this forum at different times are "necessary"--although somehow, 1080p became less "necessary" as it became apparent that it's not happening this gen), let alone "proper" LOD and "proper" smooth shadowing, you're going to sacrifice quite a lot on the texture/mesh/effects side of thing and get complaints from other people. In fact, I'll bet such a game would look quite terrible.
I assumed that SMAA was the AA type used, along with TAA, in Crysis 2. Edit: Nevermind, now I remember they called it PostMSAA or something like that. 
