I think its Sony giving it to ps3 owners up the bum hole. Sure originally it was to cut cost (even though they would be small) by taking out some chips. But then when they had newer models using software emulation, to remove that is just a dog act. Even if the BC was not 100%, it would still be good to have. Kind of like how the xbox 360 has partial BC.

It definitely sucks that current models aren't ps2 compatible but Sony is still the only one who is providing full compatibility with games two generations old.

 PS3 is making losses and while PS2 is making profits, right? So every backwards compatible PS3 means a greater cost and a loss of PS2 sale. In other words, by removing the backwards compatibility, you're decreasing the PS3 costs and increasing the PS2 hardware and software sales (because new buyers are more inclined to buy software).

Its not that clear cut though. Removal of BC will have a negative effect on PS3 sales, though it is expected to be very small since people wouldnt buy PS3 to play PS2 games in the first place; but those who are split in between 360 and PS3 might choose 360 as the perceived value of PS3 is lower now, or maybe because they are pissed (also by the price effect). 

They removed because of cost, pure and simple. It has nothing to do with trying to sell more PS2's.

BC would be a great value for the PS3 since, as people already pointed, they could sell it as a replacement for the PS2 saying: "Play all your old games, DVDs and the new games and BR".

Sony would never favor PS2 sales over PS3, no matter how much they are losing. Every PS2 sale today, means a PS3 sale lost for at least one year (next holliday season) if not more.

It isn't as difficult as you probably think. In fact it is simply no longer possible to say what is a CISC and a RISC architecture anymore. The differences between Intel based architectures and PowerPC architectures isn't as grave as you seem to think. In fact one of the biggest problem is the difference between Little Endian and Big Endian. But syou can manage these changes in most cases rather easily.

On the PS-2 you didn't only have a higher VRAM Datarate but you must emulate the timing too, to calcuate some of the more tricky functions that were used on the PS-2.

@Kars: Yeah, the number of RISC instructions have grew in size over the years and CISC processors know how to read only a part of the code. But i believe the difference still exists in the way how the code is written for each processor type.
In the end the emulation is only a question whether you can find an instruction that performs the same job as the original did and in the worst case, you can't make a general purpose emulator.

As for PS3, the BC model had GS inside (and the first had GS+EE), so the biggest problem seems to be on the GPU side.

You don't need to find a 1-to-1 correspondence... An emulator can run many RISC instructions for one emulated CISC instruction. The 360's cores are much faster than Xbox's core (3.2 GHz vs 733 MHz), so there's a lot of room there.

A general purpose emulator is always possible on turing-complete machines, the only question is performance... which I guess is part of the reason why some Xbox games are not supported on the 360.

@NJ5: Well, yes. I thought the performance was too obvious in the case of being able to do a working emulator.