Top 4 Reasons
4. Bigger screen
The PSP's screen is very large at 4.3 inches, and has an aspect ratio is 1.78:1, which is the same as true widescreen HDTVs. The iPhone has a comparitively smaller 3.5 inch screen.
The iPhone has a resolutoin of 480x320 pixels, and the PSP has a resolutoin of 480x272 pixels. So you're missing out on 23,680 pixels... I call this a draw because the iPhone is meant to be more general-purpose, and the fact that the iPhone doesn't have VGA resolution is a detriment.

3. Processor built for games
The iPod Touch and iPhone have a 620Mhz general-purpose ARM CPU. This may sound superior to the PSP's 333Mhz MIPS R4000 on paper, but consider that the PSP's CPU was designed specifically for gaming. I have a Pocket PC with a 620Mhz ARM processor, and games are horribly slow. The PSP also has 32MB of main RAM with 4MB of embedded DRAM and has a GPU with 2MB of onboard VRAM.
Chips designed for a specific purpose will always perform more efficiently than a general-purpose processor. This is why a modern Intel processor that costs hundreds of dollars will use up 80% of its power encoding an MPEG video, but a $5 video-encoder chip does the job without even getting warm. Comparing the processing capabilities of the iPhone to the PSP is comparing Apples to Oranges (pun intended). The graphics of the best iPhone game cannot even begin to compete with what the PSP does.
In addition to this, the PSP has a much more robust GPU than Apple's offerings. If you doubt that the GPU is important, then replace your PC's nVidia 8800 card with a generic Triton and see how far you get in Crysis.

2. PSP has much better gaming experience
If you call yourself a gamer, then your iPhone will not be your primary gaming device. There are only a handful of games for the iPhone or iPod touch, and these are mostly re-hashed web games like Bejewelled and Solitaire, or casino games like BlackJack.
Compare that with the huge catalog of PSP games. In addition to arcade classics and casual games, the PSP also has tons of popular gaming franchises. Tomb Raider, Star Wars, Ratchet and Clank, Daxter, Madden, Final Fantasy, FIFA, NBA, NHL, Need for Speed, Prince of Persia, The Sims, Tom Clancy... the list goes on and on and on.
There are even a lot of homebrew emulators available for the PSP. There are emulators available for MAME, Nintendo NES, Super Nintendo, Nintendo 64, Gameboy, Atari 2600, Atari 800, Sega Genesis and Sega Dreamcast... and you can have them all on one memory stick. Oh, and many Playstation One (PSX) games work flawlessly on the PSP (you'll need a PS3 to transfer the games, though).

1. The PSP can be hacked
The real value of your PSP is unlocked once the unit is hacked, which is very easy to do and requires no special hardware. Once hacked, you can play homebrew ports of popular PC games like Doom, Quake and Hexen. You can also download and play all of your old console favorites using an emulator.
One of the biggest advantages of a hacked PSP is the ability to make backups of your UMDs. Placing a UMB image on a Memory Stick increases battery life, as the UMD drive's motor is not spinning and the laser is not active. Having the images on a memory stick also lets you have your entire gaming collection in your pocket without carrying a bunch of little discs around. Most UMD ISOs are around 700MB, and the largest one can be is 2GB. The ISO images can also be compressed (CSO images), which allows you to stuff more games on a single Memory Stick. The average gamer can put 8-10 full-quality UMD images on a single 8GB Memory Stick.
There are lots of addons you can use with your hacked PSP. You can take screenshots of your games with a simple button press (which writes a bitmap to the Memory Stick), or enable cheats for your favorite games (hold a button for a few seconds and a menu appears on top of your game, allowing you to enable god mode, infinite ammo, and many other cheats).

iPhone does excel at some things
There are still some things the iPhone can do better. For one thing, it's a freakin' phone. Integration with iTunes makes it very easy to download new music, podcasts, and games. The iPhone can also be constantly connected to the Internet via 3G or WiFi. Also, if you dig motion-sensitive controls like the Wii, then you'll like the one or two games for the iPhone that use this mechanism.
It's great to have one gadget that does everything... but that gadget still does not currently exist. With the iPhone, cramming a variety of media into a small 16GB space is very limiting. I can easily fill up 16GB worth of music, much less store videos, games and applications. Until they come out with an 120GB iPhone then there will not be an all-in-one replacement for my PSP, PDA, camera, cell phone, iPod and notebook.
Like we've all known it: the iPhone is a jack-of-all-trades but master of none, especially when it comes to gaming. For a serious portable gaming experience, stick with the PSP.
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