The Xbox360 will be able to connect to any USB storage devices (like digital cameras and mp3 players), and can trade stored files back and forth.
In Microsoft's
diagram explaining it, they specifically show a PSP.
So much for the "MS hates/feels threatened by Sony, and would team up with Nintendo on the GBA/DS in a heartbeat if it could take Sony down a notch" theory.
Could it be that MS fears the Rev?