Well considering that the PSP is living off of the scraps of the DS, mediaphiles and a certain group of people that consider themselves "truly hardcore gamers", it would have been insane for MS to enter the handheld market. It's an exaggeration (I mean the PSP does have it's own merits) but the majority of the sales do fall into one of those 3 groups.
Maybe next generation when Touch-screen isn't such a hugely innovative feature in handheld gaming, then it could probably enter the handheld market, I predict clam shell design, dual touch screen, dual analogue sticks and triggers :).







