I have seen the PSP playing God Of War. It is incredibly nice.
Sony is going to own Microsoft with this one. Sony has one thing that Microsoft doesn't, which is the rights to a lot of great franchises.
I want Formula One for the PS3. Now.
What's going to kill MS is the fact that they're not almost 100% backward compatible. Sony isn't either, but it'll be a lot more games. This is what happens when you switch hardware vendors mid-stream. Sony has a consistent lock on the HW, and so does Nintendo, which means that they can at least ensure that the big titles work. Microsoft doesn't have this.
Microsoft, on the other hand, is going to try and tweak everything in Virtual PC. As well and good as that seems, there will be spots where it breaks, like with all emulators that are emulating hardware. Commodore only got to 99.something% with the C128, and about 90% with the C65 before ceasing development there. There are still issues emulating that machine with 3GHz P4's. I estimate they'll get to about 85%, and have to send out patches via Xbox Live to fix backward compatibility issues.
In other words, people who buy an Xbox 360 expecting backward compatibility are not going to get what they fully paid for, and you will hear people bitch about it loudly. Game Consoles shouldn't need Windows Update.
I also think that the PS3 is going to do better because of the dual-screen output. You will see EA take full advantage of this for the Madden franchise, and it will be huge. You will also see more sports games use this, including the NBA, NHL, and Soccer games.
That doesn't mean to say that it won't be used for auto racing or RPG games
Mitch