WTF?!? No hard drive and no backwards compatibility?!??! This is a bad move on Microsoft's part. Even if they do manage to get Xbox2 released before the Playstation 3 they will still be behing Sony.
Why do you think Sony has managed to do so well? The fact that you can upgrade to the latest and greatest system and still be able to play your old system games has been one, if not THE, main selling factor for Playstation.