The PS3 and 360 generally reach 720p on big budget titles that are not Halo or CoD, but many of the smaller games are, as you say, sub-HD.

As for the PSP specifically, yeah the lack of a second analog stick and large size are both platform impediments, but I’m not sure adding a second stick and full PS2 compatibility would really help. For the latter, if you go back and play many PS2 games I don’t think they hold up that well. Action games tend to be rough looking and not control very well. The first Devil May Cry was nigh unplayable when I tried to go back and actually finish it after playing God of War I&II.

As for how powerful the PSP2 could be and how it stacks up, I think we need to remember that the current gen consoles are about five years old. Silicon process technology has (or will shortly) be ~1/4th the size transistors that were in the launch PS3 and 360. By putting in a more power friendly and more gaming focused CPU into the PSP2 Sony could cut power consumption signficantly from the PS3 and perform similarly, I think.

The 3D performance is obviously important as well, and I’m not too familiar with what PowerVR (PVG?) who used to make Kryo GPUs with “tile-rendering” on PCs for a week or two before running away for a few years to re-emerge on smartphones and system-on-a-chips can muster as far as high performance goes, but even if Sony has to go with a more conventional Nvidia GPU again the PSP2 isn’t going to have higher than a 720p screen. The PS3 and 360 generally aren’t even reaching 720p according to pixel counting forums, anyway.

So, I could see the PSP2 having pretty decent hardware, but don’t picture it ending up with games I’d actually want to play. Unless Square-Enix remakes FFV and FFVI on it and then I’ll rob a liquor store to get money for it if there’s no old ladies I can rob more quickly on the way to Gamestop.