Japan's Ultra One technology magazine is reporting that the early PS3 consoles will include PS2 hardware to enable backwards compatibility.
There's more inside the PS3 than we thoughtThe magazine reports that, contrary to earlier reports about software emulation, the PlayStation 3 will use a hardware solution in order to run PlayStation 2 games. It's believed that the PlayStation 3 hardware in its current form not only features the new PS3 technology, but also the core components from the PlayStation 2 (Emotion Engine and Graphic Synthesizer).
Ultra One also notes that this hardware based approach to backwards compatibility is not in Sony's long term plans for the console, with a software solution to be implemented in later iterations of the PlayStation 3 once such a PlayStation 2 emulator is up to scratch.
The accuracy of the Ultra One report is still unknown, but the inclusion of the PS2 hardware in early PlayStation 3s would raise the total cost of each PS3, and thus increase Sony's losses. We'll be sure to keep an eye on this story.
I think it's worth pointing out that this isn't a confirmed story. As far as we know it hasn't come from Sony so there's nothing concrete on this yet.