I would expect MS would have to launch another console in 2008 to be competitive with the PS3.
The PS3 show was all smoke and mirrors. What you saw coming out of E3 was all pre-rendered CG and not actual gameplay.

WormGod:

My friend at Epic said the same thing about the PS3. Alot of people are going to be pissed off when they've seen all this eyecandy and the 15-year-old "press" has led them to believe that what they've been fed is all in-game stuff. While he said a lot of the 360's stuff was pre-rendered, he said that the PS3 party could have been a hollywood movie release for all he could tell.

Everyone is touting the "superior" hardware of the PS3, I'm wondering if its going to lead to better games. I don't really care however, as I'll never own a console. I hate playing FPS' on a stupid controller.