Deviation59 and SSJ12 are dead on. The embedded RAM on the GS has twice the bandwidth of the RAM in the PS3. I don't think it will be possible for them to emulate the GS on the PS3 properly because of this.

OK, this is what I think :

1/ 40gb may never be able to play PS2 games
2/ PS2 will not be discontinued before 2-3 years
3/ Sony may continue to release some 80gb like PS3 for people who want to buy the high ended PS3 (actually it only exists in NA for the moment)

4/ Sony will release PS2 ADAPTED games on PSN that will run on PS3 BUT that you will have to buy, I mean, buy again. That will give Sony a bit more money.

I'd prefer they spent more time on expanding the amount of PS1 games that are compatible and of the ones that do work on the 40gb PS3, to make them less glitchy.

I can't play FF8 because I own a 40gb PS3 (which plays FF7 but not 8) and a PS2 (which no longer plays PS1 discs for some reason).

Wait... the PS2's ram is faster then the PS3s?

How does that make sense?  Why does the PS3 have slower ram? 

I thought the Xbox had Software Based emulation, and that seems to run pretty well

I hope that Sony will someday (maybe at the FF XIII Launch), produce a new console generation of the PS3, that is compatible to ps one and ps2 games. I have a PS3 60 GB and I am proud of the backwards compability.

Not every XBOX game is playable on the 360. 

Because the 4MB of VRAM in GSX is embedded into the chip. That is why bandwith on it so high. Its the same reason why the 10MB frame buffer on the 360 GPU is insanely fast.

Ya... It's not whether or not they'll allow it, it's whether or not they can do it