One thing I forgot to mention in the post is that there is apparently an OnLive API that some games are using that replaces the cursor in the game with a local cursor. Not all games can use it (for example, World of Goo's cursor is blocked by walls and such which is critical to gameplay), but Unreal Tournament, and OnLive itself, use it in the UI.
Edit: of course this wouldn't solve the case where you are actually doing something in Photoshop that might require real-time feedback like the airbrush tool!
If you're having trouble with a mouse cursor, then no video game that requires interaction will be playable. QuakeWorld, IIRC, was the first real game to solve the latency problem. And they did it with prediction that lets the UI maintain responsiveness while hiding latency. That game was playable up to maybe a 200ms ping time and with a dial-up modem. That's impressive. But it was also a lot of client-side magic, which is what VNC is doing with the mouse.
In addition to that, no Wii game will be playable with this thing, no FPS, no World of Warcraft, etc. etc. I think this is why serious game companies aren't even commenting on it. It doesn't even register to them. I can really only see OnLive taking business away from the Appstore or Android handheld markets. Extreme casual gamers that don't know the difference between an Xbox controller, a Wii nunchuk, and a 1980s joystick will be the market here.