Japanese technology magazine Ultra One is suggesting that Sony is going to achieve backward compatibility with the PS2 in the PS3 through hardware, not emulation.
Sony will include the PS2 chipset in each PS3 in a move that likely means that the price of the PS3 will rise to compensate for the inclusion of the PS2.
It can be speculated that by using the same hardware as the PS2, there may not be any visual upgrade when playing PS2 games on the PS3.
According to the English translation by IGN of the Japanese magazine's report, the hard drive on the PS3 will only store media content, not system features, so that users can use whatever hard drive they like on the system.
Sony has also promised that new and upgraded PS3 models will always be compatible with older software thanks to downloadable patches; some users were concerned on this point because in the past, newer PS2 hardware did not run older software.