I would definitely agree that the PS3 has not reached its full potential. However, as past console generations have shown us, the more powerful hardware isn't necessarily the one that ends up winning. Both the PS1 and PS2 were not the most powerful consoles of their generations, yet ended up outselling the other consoles who arguably never saw their full potential used.
There is a lot of concern that the PS3 may end up like the Xbox of the last generation - technologically superior, but developers didn't spend the time to push the machine to its limits because it was more profitable to pump out games for the PS2, then simply port them to the Xbox with as little effort as possible.
In terms of the 360 vs. the PS3, it's going to depend on what's important to you in a console.
First off, HD-DVD is indeed DEAD. Toshiba announced last week they will be discontinuing development of HD-DVD. Players and movies are currently being sold at ridiculously low prices just to get rid of the inventory. Even Microsoft's HD-DVD addon drive for the 360 is now selling for $50, and includes several HD-DVD titles. There's a very good possibility that Microsoft will release a blu-ray drive add-on for the 360, so it can play blu-ray movies, but, if HD movies are really important to you, a PS3 makes a certain amount of sense since it is still considered the best blu-ray player on the market - and as a bonus it can play games too.
Either way, blu-ray and hd-dvd mean nothing for games. Microsoft never intended to release games on hd-dvd, and even though blu-ray offers over 3x the space over a dual-layer DVD9, none of the games for the PS3 thus far have really illustrated why a game needs 25GB, much less 50GB of space. On the 360, there are currently 2 games that require more than 1 DVD, but they're both long RPGs, and judging from your question, that'd be nothing new for you.
So...yeah...what about the games? Like you, I owned a PS1 and PS2 - mainly because of the RPGs. When the battle between the 360 and the PS3 began brewing, I figured it was basically a slam dunk for the PS3 since all Sony had to do was convince its big franchises to just pump out some sequels, and they'd continue to dominate the market.
That didn't happen. The PS3 arrived with a rather pathetic launch library. Half of which were titles that had been on the 360 for months, and the other half were titles no one cared about. It was also odd to me that the PS3's strongest, most hyped launch title was, of all things, a FPS. If you wanted to play FPS titles, the Xbox was the console of choice from the previous generation, and with Halo3 looming in the 360's near future, it only made sense to once again go with the 360 if 1st/3rd person shooters were your games of choice.
Unfortunately, not a whole lot has changed for the PS3 since launch. While it has managed to get a few more good exclusive games, many other titles - including FFXIII and Gran Turismo - have reportedly slipped into 2009 and 2010(!) respectively. Meanwhile, Sony's new online service, HOME, isn't due until later this year and will hopefully address the shortcomings their current online system has when compared to Microsoft's Live.
MGS4 isn't due for the PS3 until November of this year. There still hasn't been any definitive word on whether it's going to remain a PS3 exclusive or if we'll eventually see a 360 version. Given how expensive MGS4 has been to develop, and how slow software sales have been on th PS3, it's hard to imagine Konami being able to afford to keep the game as a PS3 exclusive forever. Meanwhile, there's been zero word about when Kingdom Hearts 3 will be released. I don't think it's even in production yet as Square Enix is probably fully engaged on getting FFXIII ready. At this rate, it might be 2010 or even 2011 before KH3 comes out on the PS3 (assuming it's still going to be a PS3 exclusive that is...)
In closing, it's certainly possible for the PS3 to come from behind and overtake the 360 in terms of games. However, right now it's hard to see this happening. When it comes right down to it, when buying a game console, you should only be concerned with the games that are out right now - and not the titles that are "coming soon". Delays, and even cancellations, aren't unheard of, and it would be silly to buy a console based on the hype of a future game, only to have that game be a total stinker, or never even materialize at all. Given that, the 360 is the stronger console for gaming right now. Its library of exclusives is larger - even in the area of RPGs. Even the games that are on both the 360 and the PS3, there's very little difference between the two versions. Then there's price. The 360 is still less expensive than the PS3, and most likely, this will be the case for quite some time.