1. Vertical (I've always loved the longboxes - I have many PS1 games that, even though covers do exist for them, remain coverless because they ain't vertical)
2. PS3 Backwards-compatibility, although this is only because I have misplaced my PS1. Otherwise, I would be using my PS1.
3. Always keep them separate. I have my shelves arranged by generations, so my PS1 games are near my Saturn games, while my PS2 games are near my GameCube and Dreamcast games.