Finally able to give it a go now that they have added the continue button and I am very impressed. Sure latency was a little high and the image quality wasn't great but it was still playable even at this early stage.
It really is staggering to think of the techincal hurdles that they needed to jump over to get this running in the polished form that it is.
They also seem to have got a lot of developers on board as most games seem to be slightly customised to fit into on live.
Regarding the image compression people have been mentioning, I remember the CEO stating that one of the key components of the tech was the algorithm/codec they developed to stream. It is highly variable, and dependent on connection speed and latency. So its logical to assume that the faster your connection and the closer your location to an onlive data centre the better the image quality.
Obviously it won't increase above 720p for quite some time, and frankly given their target audience (users who have low resolution laptops, or are only used to the current 720p consoles) it is perfectly adequate.
Its definitely not going to replace my lovely PC, but it is impressive, useful, and very innovative. I think they have answered most of the critics.
Finally got it working myself and I have to say I agree with everything you said. Sure, there is some input lag but it's nowhere near as bad as I was expecting. Very impressive TBH.