For you latecomers/sane people who may have been waiting for a PS3 price drop but are bummed out by the $400 40GB PS3's lack of Backwards Compatibility (BC), Sony has a solution for you.
Buy a Playstation 2.
Clearly if you already have a PS2 you have an advantage. You can already play a higher percentage of PS2 and PS1 games than the current 80GB model (and all PAL versions), and the new 40GB model will not have any BC at all.
According to Sony, this is better than the initial NTSC PS3s. Where the launch PS3 was $600, you can buy the new $400 PS3 and a brand spanking new $130 PS2 for the combined price of $530! That's $70 less than what everybody paid 10+ months ago for the same functionality.
-- Based on an interview about the new 40GB PS3
The above was mostly tongue-in-cheek, but I do understand Sony's logic (though I don't agree with it). You can buy a new PS3 with a new PS2 and get 100% compatibility, there's no arguing that, and it's cheaper than $600. There are some features that the PS3 uses with its BC, but in all cases you should keep your PS2 if you already have one.
I don't agree with them taking out the BC for this model because it is more important than Sony is giving it credit for. Sure, they needed to cut costs in order to have a nice price drop, but I would think BC--particularly now that they've switched to Software emulation--would be something that was set in stone for the PS3. Even if BC isn't a priority for them to continue fixing, it's part of the PlayStation Legacy that they've been building up. I understand that one can keep their PS2 (or buy one) to play the games, but I don't agree with that being the only option available to one who will be stuck with this new setup.