We do know that the 60 GB American units have the EE and GS together in one chip, the motherboard pictures in several sites clearly show a chip labeled "EE+GS" or something like that. But I have posted a link before in which Sony says that the European model has the GS only.

ouch thats not good

I am getting really confused. I live in the UK. Will the 40GB PS3 be able to play my PS1 and PS2 games?

Yes or No.

Right here goes.  Look at the following image

This is of the US 60Gb PS3 which includes the EE and GS integrated on the one board.  Now look at the next image.

This is of the 60Gb UK/Euro model.  Now if you notice that it doesn't have the same EE + GS chip as seem in the 60Gb US model, it has a black mystery chip instead.  We assume that this is the GS chip alone.  Now look at the next image. 

This is a close up of the EE+GS combined chip that appeared in later PS2 models and the PS3 60Gb model.  Notice the year on the chip - 2003!  Now look at the next image.

This image shows the two separate chips as they appeared in the original PS2 for the EE and GS.  Notice the year on both chips - 1999!

Now, firstly; we have been told that the European PS3 doesn't have full backwards compatibility, and doesn't have the EE chip, but it still has the GS chip and uses software to emulate the EE.  So if the GS chip and only the GS chip is in the European PS3's why doesn't it look like the original chip as seen above from 1999?

Right, I understand that they may not have any original GS chips seeing as they were more than likely discontinued after Sony produced the combined EE+GS chip from 2003 onwards and now in 2007, they don't have any of the original GS chips available to put in the PS3....so did they manufacture a new chip from scratch?

Why do this...surely this would cost them more money over the course to start the manufacturing of a new chip (even though it's a replication of a chip originally used in the PS2)...I reckon this would cost more than just placing the EE+GS combination which is not only available from the US PS3's but from the PS2's that are still ono sale today.

So, this makes you think...is the mystery ? chip not infact the GS chip, but is another chip that is attempting to replicate this chip? Again, why???  Surely this would cost manufacturing again etc.....

So what exactly is this mystery chip?  As I very much doubt it is infact the GS chip.

Ideas??? 

Here in Italy is official that from October 10th there will be 2 version on store :

1) The first version will cost 399 euro, will has only 2 port and no sd card reader. This version will not have back compatibility with PS2 games and will not support super audio CD. The harddisk will be 40 GB.

2) The second version will exist until stock clearance then Sony will probably choose to add a more big harddisk. This version is like the old european SKU with 2 games and 2 pads. It will go on sale for 499 euro.

Like in Switzerland, this 2nd version is simply selling the remaining stock of the starter pack. Do you see what goes with the 40G SKU in Italy? Here, the prices are

Starter pack Sfr 799 - 2 Controllers, 2 Games

New 40G SKU Sfr 649 - 1 Controller only shown in packshots

So the new SKU is actually more expensive than the starter pack if there is nothing in the new SKU ($1 = Sfr 1.18)!

Note added 11/10: The first reports are in and people seem to appreciate the noise level of the 40G PS3 - There is none (and it doesn't get warm - so there seem to be 65nm parts inside as well) . At this price, the 40G version might turn out as an excellent blu-ray player.