I never owned a PSP, and never liked the device itself, but I must agree it is the best handheld, but I do think the fold up design of the DS is certainly practical.. it allows for more than just one way of use (resting on table, using at angles without bending wrists etc). I'm 6'4" with massive hands so I'm probably not the prime target of handhelds, however :P
I think a mini analogue controller such as on psp would be a step in right direction and wouldnt add much bulk. Other than that I just think gaming machine and phone will never exist as there will always be compromise, you can buy a psp or ds for just over £100, far better option, the control lay out needed for proper gaming would make any phone just too big, IMO..