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Sony not ditching physical game distribution.
Let's be honest in saying that the PSP Go didn't exactly capture the imagination of the public with it's release last year. A more pocket-friendly size may have lured many towards the device, however lack of a UMD drive and the inability to play one's already purchased back-catalogue of PSP games drove many away, not to mention game prices on the PS Store being similar to those of retail, only without the flexibility of price fluctuations and frequent sales.

So it comes as no surprise then that Sony isn't taking the digital distribution-only route for the newly announced PSP2 or "NGP". Instead, games will now be distributed on Flash Memory devices similar to that of the Memory Stick Duo or Nintendo [3]DS game cards. Unlike the DS and 3DS before it, however, it doesn't appear that there is an upper limit on the size of these storage solutions. The 3DS currently has a limit of 2GB.
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Added: 27/05/2011