PS3's firmware 1.8 upgrade was a great improvement for SD viewing, though not quite on par with the Toshiba XA2. Note, however, that without a high quality display you will not be able to tell a difference.
I love both the PS3 and the XA2. Check the current and upcoming releases on both formats and factor in your interest in any PS3 games.
Also, worrying about which format will triumph is premature. Don't pay much attention to the tons of posters who will, I am sure, advise you otherwise. The noise to signal ratios in both the HD DVD and Blu-ray forums have been quite high for some time. The console market is large enough to support all three systems, but the "HD" market may not even support one new format. Don't believe the hype on either side.
Anyway, since I'm a gamer and like the scalability and support of the PS3, I would be slightly inclined to choose the PS3 if I had to have only one of the aforementioned choices, but definitely let software influence your decision.