I went to the taping of the Engadget Show tonight and they had a pretty extensive demo of Playstation move, including some tech demos that were apparently not seen before today.
Engadget hosts Josh and Nilay were pretty up front about the lag and you could see it from the audience, but they also noted that after a few minutes of play you recognize it is built in and start to adapt to it. I'm not convinced but I didn't get a chance to play.
But the lead scientist who is in charge of the tech behind this said something very interesting: due to the inherent lag built into digital signals like HDMI are ALL going to have this and it will affect all current and future systems. Many of us have had to 'calibrate' guitars and other instruments to compensate for this lag in games already, but when you are going for true 1:1 real time fidelity this lag is always going to be a concern.
The question then becomes is there a way to fake it, some kind of predictive / adaptive rubber band that stretches back and forth past the gross movements. Pretty interesting stuff and it will be this lag alone I believe that has the chance to sink these kinds of tech unless it is hidden well.