Yes, but they also removed the Graphics-Synthesizer (PS2 GPU) now which is needed for PS2 games.
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I suspect that the GPU could also be emulated in software if they wanted to in the future. PC emulators manage to do this.
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I suppose. But are they willing to do it? Suppose not.
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I suppose. But are they willing to do it? Suppose not.[/QUOTE]

They would if there was money to be made by selling the old PS2 games through Playstation Store in a few years time.
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I hadn't heard they were dropping PS2 compatibility from the newer PS3s. Personally I don't like that and would much prefer it remain.

BTW, it isn't to do with hardware. The NTSC Japan and USA PS3s came with the PS2 emotion engine hardware built in for PS2 compatibility, but this wasn't the original intention of Sony. They solution was always going to be software emulation based for PS2 games, but at launch they didn't have the emulation working well enough in just software so they added the emotion engine into the system.

But all European PS3s don't have this PS2 hardware and PS2 emulation is done purely in the firmware software. Therefore if they are dropping the backwards compatibility it would suggest it is instead being removed from the firmware, so if owners of older European PS3s upgrade after this they may also lose this backwards compatibility in the latest firmware.

I personally think that if they do drop the support it is actually directly related to hacking and running unsigned code on the PS3. Until now PS3 hacking exploits have been through back doors found in PS1 and PS2 games. Sony may therefore be removing the support to prevent this from happening. Something I don't agree with as I want backwards compatibility so I don't need to have two systems connected to play all Playstation games.
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To be honest I think that they are just looking for an excuse to have dropped the price. By saying that they have stripped the USB's, card readers, backwards compatibility and downsized the HD they can say - well this one is worth £299 because its not as complete as the 60 GB system. But there is no way that making these minor changes can amount to £200 worth of savings - Sony will still be loosing hundreds on every one sold, just like they are with the original. By selling it at this price it acts to justify the higher price tag of the original model and goes someway to addressing those who said things like 'i will never need 60GB, whats the point in card readers, Super audio playback sucks, why would I play PS2 games on it...' etc. It also brings it into the sweet spot for people that could not afford the original system. As for me Im a techophile and I want the very best system my hard earned, well maybe just earned, money can buy - 60GB isnt enough, I want two HDMI outputs and 30 USB readers. Hell, stick on another optical output and Ethernet connection while your at it. What do you mean I'll never use them?...
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Yeah, I'm definately holding out for the higher spec model to drop in price.
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I see the only real loss for me in this new model is the backwards compatibility and the USB ports. Having a huge catalouge of PS1 and PS2 games, backwards compatibility is definitely required. And I'm allready using three of the four USB ports on mine, all four when I decide to charge the controller there (so the PS3 doesn't have to stay on when not in use, I normally just charge the controller on the PC which is on all the time anyway). So only two USB ports doesn't cut it.

As for the rest, having a 40GB harddrive instead of 60GB is a non-issue, I yanked out that 60GB one and replaced it with a 200GB one almost immediately anyway. And the card-readers I've only tested but never actually used. For data-transfers I use an external HD (as I don't have any card-reader for the PC anyway), and for other uses my TV also has the same card-readers and can do mostly the same things with the content. Yes, even play MP3s. So I've no real need for those ports, but I guess they could come in handy for smaller data-transfers if I ever get a reader for the PC.

But less USB-ports and no backwards compatibility is a serious blow for me. If I hadn't allready bought one, think I'd still prefer the current model too.
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Does anyone know if this new cut down PS3 will eventually replace the existing higher spec model? Or will it just be a cheaper option?

I definitely don't want one without USB and card reader slots. Might have to buy one soon if they are discontinuing the better model so I can make sure I get one!
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The 'neutered' model is likely to become the standard unit for the time being. The 60GB model will be on sale for as long as stock lasts, so if the extra ports and backwards compatibility are must haves, it might be a good idea to consider picking one up. Whether Sony will re-introduce the 'full' models sometime into the future? No one knows. There's been talks of a 80GB unit, but whether that one will have all the extra bits and pieces remains to be seen.

Like mike already stated, Sony needed to introduce a system at a cost that would entice people who had a PS3 on their wishlist, but simply couldn't afford or justify paying such a high price for one. I think there were a LOT of PlayStation-loyal people still waiting for an acceptable price tag, and now that the price has been dropped, I think the PS3 will do good business over the holiday season.

The price difference between the 40GB model and the RoD360 is only minimal now (€ 50 difference, and for that you get more functionality), and with games like Ratchet, UT3, Uncharted and PES2008 right around the corner, the biggest software draught is also over.
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