One of the reasons that the PlayStation 3 is so large is not because there is a George Forman Grill inside, but instead a PS2. Currently, Sony is struggling with its emulation software, and the initial barrage of PS3’s will most likely include a whole PS2 chipset inside in order to ensure full backwards compatibility. Nothing ensures backwards compatibility like putting what amounts to the full previous console inside.
Obviously, Sony will be working to replace it with software emulation as soon as possible, as including the chipset will only mean more losses for them per unit sold, but fanboys have been saying that even with the emulation software, they’d almost rather the full chipset, as actual hardware is usually more reliable than emulation of hardware.
Also of note is that it has been said that the PS3 will run from included flash memory which means that more than likely, very little of the included hard drive space will be reserved for the PS3 software, unlike the seven gigs taken by the Xbox 360.
Source: Engadget