Thanks to Gamesindustry.biz for their story confirming that
the PlayStation 3 will offer backwards compatibility with earlier PlayStation consoles via emulation, offering a quote from Sony boss Ken Kutaragi, sourced from the Japanese newspaper Asahi Shimbun:
"PSone runs on the PlayStation 2 through emulation rather than actual hardware. PlayStation 3 will offer the same compatibility for PS2 software and the format will continue forever." He also partially attributed the PS2's success to its multi-purpose nature, saying
"[PS2] offers a sense of insurance because it is compatible with PSone and DVD movies", echoing
earlier suggestions about DVD players in consoles, and obvious advantages to backwards software compatibility.