Couple things to note here (obRepeatedDisclaimer: I'm in the Xbox camp with the current generation, though I own all three consoles, and really think going down the massively parallel CPU route was a dumb move for both Sony and Microsoft; if I had a handy few hundred million dollars, I think I'd launch the DaveBox -- a bit less capable than the PS3 and Xbox 360, but with a much more normal architecture, so developers will be up to speed on the thing before 2008)...
1) Apparently, if you figure things the same way for both consoles, the capabilities of the two systems are very close (in terms of CPU and GPU). The Xbox 360 is much better at integer math; the PS3 is better at floating point.
2) Microsoft went with standard DVDs as the storage media for Xbox 360 because there certainly won't be a winner in the next-gen format wars by this fall, they can't use Blu-Ray without paying royalties to Sony (and unlike Sony, have no real interest in promoting the format), and very few Xbox games used more than 3GB (about 1/3rd of a single-sided, double-layer DVD). It's likely that any game that needs more storage could simply be put on multiple DVDs; multi-CD games weren't really a problem on the PlayStation (or on the PC, in the time window where installing a 5-CD game to your hard drive was impractical).
In recent interviews, Microsoft higher-ups have said there's a good chance that they'll do a version with next-gen (HD-DVD or Blu-Ray) playback capability later (once it's clear they won't be doing the equivalent of including a Beta VCR), though games will still be standard DVDs.
3) Sony's PS3 demos at E3 are mostly pre-rendered (even if they're trying to imply otherwise); Microsoft's Xbox 360 demos are mostly actual games running on alpha dev kits (modified dual-G5 Power Macs with Radeon X850XT cards, which are roughly 1/3rd the performance -- for gaming -- of a real Xbox 360).