We got the new Leapster Explorer for our son for his third birthday 7/11 so his has had it for almost a month. He is very good with games in general and like your son learned all his letters and sounds watching the Letter Factory and related dvds. Even though the system is designed for 4 years and older, he doesn't have much trouble at all working it. It comes with a mini game which is a pet to take care of. They bathe it, feed it, play fetch (fine motor skills) and they get it to do tricks by tracing letters on the screen.
We have two games for the system so far and two more in the mail on the way. The first and so far easiest for him is the penguins of madagascar game. At first he needed a little help jumping from one platform forward to the next but he figured it out in about a week. When he reaches certain points the game goes off into mini learning games, where he has to count how many of an object and click the right number, choose what is biggest, or what number comes next in a sequence. It also includes an "animal fact finder" game- he has to choose from pictures of 4 animals "which animal flies?" "which animal makes this sound?" etc until one is left, and then the system educates him about the last animal.
We also just got the Mr. Pencil Saves Doodleburg game, which I really like but is a little harder for him to follow right now, mostly just because it is more open ended rather than following a straight move forward kind of plot. Anyway, with minimal direction from me he does enjoy it and the game focuses on teaching him how to draw lines and gradually works to making more complex shapes, letters, and numbers. It also teaches colors and coloring inside the lines and we haven't gotten that far into it yet. The storyline along with the character who shows him everything does make it fun and engaging, basically he gets to be a hero for the town by repairing the lines, words, colors, etc.
We have the Dora game and the Toy Story game on the way but not here yet so we will see. Long story short, if your just turned three year old is anything like mine he will love it and there is plenty of space for him to grow into it as well.