Thanks Subzero, although, being a gamer is hardly the credentials required to talk about these things. But I will still entertain the idea. I've been a gamer since the Atari 2600, perhaps this is worth something :)

360 is already doing it, there's nothing to debate here. It's here and now.
1) Even though it's new technology, the mechanism by which games interact is not fully related to the game. The magic is all in the controller itself.
If there is one thing Microsoft knows how to do well (and Sony don't know how to do), it is to create simple platforms APIs for developers to hook into. That explains the explosion of games for XBOX360 vs. PS3 despite the lucrative market the Sony is behind. Cell processor is not much different than any processor. It's the gaming OS that makes the difference. Apparently MS makes a better job at that.
2) That's not true, the Wii Fit and Guitar Hero's unusual controllers are great examples of how this is not the case. The games became instant global hits. With controllers that are not "in the box"
Additionally, the games will mostly continue to support the older standard controllers. It's a NO-OP for developers to support this since they already do.
3) You assume too much. The prototypes are working today. Live in front of customers. From prototype to manufacturing shouldn't take that long. We'll have to wait and see, but I am guess no later than Q4 2009. What you say completely contradict with points 1 and 2. This is happening now.
It's a well known fact that the hardware is light-years ahead of the current software. PS2 is an example. For the best part of the last 2 years it has been outselling PS3 even though it’s what, 9 year old hardware?
To add another nail in the coffin of this argument, consider the Wii. With processing power 1/10 that of Xbox360 or PS3. It still rules the world of entertainment, and likely to continue to do so for the next year or more. So I don't think this is even a point
Part II of 3. DVDs, bluray and all that kind of media is going away. Online media is the future. The days of all media types are numbered anyway. (And xbox360 is already supporting that, through Netflix and their new 1080p Store, can't top that, not even through Bluray)

Finally, for the ring of death. That was the v1 of the hardware. Very few people saw it. But for people who got the more recent hardware, didn't even have any of these issues. (I've had mine ever since the Elite came out, and never had an issue). I don't know anyone who ever had an issue. But I'm sure many people had that problem but not recently.

@Dave, LOL, I thought it's a maternity thing at first :)

Subzero, I agree. It takes a gamer. However, from a market point of view. The next generation consoles are trying to appeal to the rest of the community since there aren't many couch potatoes geek true gamers out there to make enough money out of :) So ladies’ of the house ...etc are the real target.

RE:
1) The demos showed Natal controlling already available interface. The XBOX menu. The gestures were simple enough and easy to understand. They even made sense! They looked like what you would think in your mind when you press a button on your remote control.
2) Cell processor (and Xenon used in XBOX360) both come from the same Power architecture that IBM makes. Microsoft did a better job "easing" the process of developing software for the new processor, because, let's face it, Microsoft makes the most prevalent OS in the world. Running over 3 different hardware architectures and potentially capable of running over any processor architecture (like it used to run on MIPS, SPARC, ALPHA and others), this was back in the NT4 days. So how about now?
Don't believe "hypes". Either way, it's not about Raw processing power. Although all things considered, they're both comparable by most experts.
3) It doesn't matter how many games are there for the Fit or Guitar hero/rock band. They are hits, money making, flying off the shelves. While PS3 is collecting dust. A thing to consider though, Guitar Hero is available also on PS3 since it really is a very simple game by all means.
4) I don't know when it will come, I'm sure we'll all know soon. But I'm not really worried about it. The day it starts shipping is the day I will get mine. Pure and simple!
5) "The death" happens to everyone. At least Microsoft doesn't ship rootkits on their systems like Sony's scandal few years ago. If there are mistakes, they're usually unintentional.
6) You didn’t say anything about the very successful and truly live Xbox Live. That’s a killer app by any measure. Providing downloadable content, and truly live experience propelling XBOX farther than the idiotic online experience of the PS3. It’s understandable of course, they want to sell more blu-ray. Which means downloadable media is a threat to their franchise. Sadly, these medias are in their final days.

The most interesting thing in our discussion is that you started by saying you're an MSX gamer. Funny, MSX was also a Microsoft Platform :)

@Khaled
If it did 10% of what they showed, it is still awesome!

Subzero, this is not "news", it's a "rumor". The engadget folks spell that out clearly. Everyone is speculating. Nobody knows! Microsoft -surprisingly- keeping the whole thing under wraps and even the best analyst is left guessing!

They did mention that other than the new controller hardware, THERE WILL BE NO NEW HARDWARE. However, a "rebrand" (Xbox Natal) is not farfetched. But utilizing existing hardware.

You have to see the market side of things. Although old owners are a target, the REAL target is the millions of Wii users looking for the "next thing" since Wii is really, REALLY, dated technology, while Xbox has HD and a million other thing to make it better positioned to cultivate that ripe market
Now the reason I think Microsoft is going to try to rush ship this VERY SOON, is ... By mid 2010, WiiHD (or Wii2) or whatever Sony can do WILL be unveiled AND Microsoft will lose a great opportunity to catch this market. So my money is on Microsoft releasing "something", perhaps Natal 1.0 that might not be perfect. But knowing Microsoft and how it worked for the past 30 years, this is exactly how the captured the markets.

Imagine an XBOX Natal without controllers and being sold for $199 during the holiday season? They would sell millions