Wired touched on this a while ago, but I just came across a new article that offers a little more detail. The idea is when you're working with non-human representations of humans (robots, cartoon characters, 3D characters, etc.), as you try to get more and more natural or "real" looking, you hit a certain point where the flaws in the representation overwhelm the illusion. As a result, instead of looking more real, such representations actually look less real. The phenomenon is called the "Uncanny Valley."
I was previously exposed to this idea in the realm of 3D graphics and the challenges of creating realistic humans, where this valley is a major obstacle to be overcome. What hadn't occurred to me at the time was that this curve can also be used to think about things like undead, monsters, zombies, etc. where you might actually want the characters to be just creepy enough to not look real.
The other thing I hadn't considered is what might lie on the graph at the peak just before you hit the valley. Characters at that point would be highly appealing, but not necessarily hugely human. As the article notes, "Here are fairylands and alien empires that never were, beautiful and terrible, in all their myriad variety." Think of all those Pokemon characters, Mogwai, and maybe even EB here.