The NGP may not be able to play the soon-to-be-defunct UMDs powering the physical media of the PSP, but it will be able to play all the PSP games currently available for download on the PSN. Also, players will not be locked into the original control scheme of their title of choice, as the games will be able to support the second analog stick of the NGP.
Since the PSP lacks a second analog nub, shooters on the system had to revert to using the D-pad or four face buttons to emulate a second stick, or feature a lock-on mechanic like the one seen in the recently released Parasite Eve follow-up, The 3rd Birthday. Resistance: Retribution went so far as to allow players to hook a PS3 controller up to their PSP to enable dual stick gameplay. Thankfully, such compromises will soon be a thing of the past.
PSP games played on the NGP will also be visually enhanced, similar to the "smoothing" effects available when playing PSX games on the PS3. No word yet on whether or not the touch or motion capabilities of the NGP will be supported on certain PSP titles, but it sure would be nice to play some Locoroco with tilt controls.
Regardless of the launch lineup, the NGP will still have a huge backlog of stellar PSP titles (and some not so stellar) available with enhanced controls and smoothed out graphics. Expect more details to emerge at E3.