Speaking to Japanese website Impress Game Watch, Kutaragi explained that a balance between hardware and software emulation is necessary for PS3 to be fully backwards compatible. "We can do it with software alone, but it's important to make it as close to perfect as possible."
Kutaragi feels that the launch of the Xbox 360 will instantly make the original Xbox obsolete unless it is fully backwards compatible - and he doubts MS can solve the problem. "The only way to avoid that is to allow 100 percent compatibility from launch, but MS won't be able to guarantee that. It's technically very difficult."
you realise of course that sony have exactly the same issue only theirs is made more complex by the addition of several proprietary chips within the ps2 AND the fact that ps1 emulation will require the SAME solution as ps2; a ps1 within it.