Why can't the PS3 do this?

[shams]

This is the whole point of the "software" emulation of previous games (rather than using the emotion engine/hardware solution).

Are you sure that it isn't doing it - at least on newer PS3s? I would definitely expect it to...

Note that the games that use non-textured shading (gouraud) are the ones that will look the best, as the renderer can get a perfect graduation of colours in high resolution (that's why the Kingdom Hearts game looks so nice).