1) The only difference between science fiction and fantasy is what's printed on the spine of the book. It's a big giant continuum, like most other things in life, and only our primate need to categorize really drives these debates. There are books which are incontrovertibly fantasy -- Lord of the Rings -- there are books which are incontrovertibly SF -- The Moon Is a Harsh Mistress -- and there are books all over the middle ground -- Perdido Street Station. The details of this discussion are essentially arguments about the boundaries between marketing categories or arguments about the suitability of various critical tools. Not that those aren't important, perhaps very important, but they are not inherent characteristics of the text.
2) I was quite struck by nihilistic_kid's comments, wherein he seemed to be making the case that genre is literature of the extraordinary, and that this represents a sort of mannered and perhaps pathetic escapism.* I for one am fine with that. There is a literature of the ordinary, but I don't think that in general that's what our genre is about, China Mountain Zhang notwithstanding. In our genre, even when the heroes are working class (Gully Foyle, anyone?), their circumstances (setting, story problem, whatever) tend to be extraordinary. For a non-genre/non-print example of literature of the ordinary, I give you the movie Planes, Trains and Automobiles -- I had a very hard time enjoying that movie for the simple reason that I had personally experienced almost everything that went wrong in the course of the movie. It wasn't funny, it simply reminded me of extremely irritating circumstances of my own. I'm much more interested in the extraordinary, The Adventures of Baron Munchausen, for example, simply because it is something different from my own life, and it takes me places I wouldn't otherwise go. Not because I'm secretly convinced I'm a special unique snowflake who deserves only the right recognition to walk at the head of the parade, but because I like difference.
* With Nick I'm never certain I'm reading him correctly, and I'm never certain where his serious/snark curves have intersected in any given text of his, so I could be misunderstanding him. I still enjoy the hell out of him, even when he's crapping on me.