Rabs
There are a couple of reasons why a HD is superior to a DVD:
Speed.
CD\DVD have a much slower transfer speed. Your typical 16x drive transfers data at 21 mbs/sec. A typical SATA2 Hard Drive is at 300 mbs/sec! Thats just typical, there is of course much faster in the business world.
Space
When you install a game on PC, the installer unpacks compressed files unto the HD. This is a enormous advantage because programmers can fit much more data that is compressed on a DVD than uncompressed DVD.
On the other hand, a console, because it needs to read the game directly off the DVD it cannot use compressed game files. The catch about compressed files is that they cannot be read directed, they always must be unpacked first. One of the biggest differences between this generation and the previous generation of game consoles is that the new ones do in fact use the HD for installations (but only partially), but I think this trend will continue. MS has already said it has, I suspect Sony and maybe Nintendo to do the same in the future. Sont had already mentioned thats the PSP2 might be HD only, (no mini disc).
Therefore, console DVD's are much more limited in space. The biggest problem console developers face is making sure the game fits on the game DVD. This is why console games are inferior to their PC brethren. PC developers have no such restriction.
Donkey
Its the old Cat and Mouse game between Console and PC, but ultimately PC's win. The reason is this: At best, a console can only match what CURRENT PC graphics card can do, not surpass. A year from now I will replace my current card with a brand new one, but a console owner will still be stuck with the same chip that was sold with the machine.
When we say "graphics are better", we are not comparing the actual art of the game. Art is art. You can easily put excellent pc-level art on a console. But you need the 3D engine that can actually run the art at a acceptable speed (aka Frames or FPS). Thats where PC pulls ahead, its hardware at which the speed they RUN the art.
There is also the fact that consoles are limited in resolution by the TV, this cripples them as well.