I've heard that only a 80GB PS3 and not a 40GB PS3 is backwards compatible with the PS2 games. why is that?

Answer 1

This question is an often one, so that's my cut & paste answer:
1). 20GB has no chrome trim, no memory card reader and no wi-fi. Not manufactured anymore. Has the best backwards compatibility with PS2 games due to Emotion Engine (PS2's CPU) and Graphics Synthesizer (PS2's GPU) installed.
2). NTSC 60GB has the same backwards compatibility as 20GB version, also has memory card reader and wi-fi. Has a chrome trim.
3). 80GB - extended memory, but reduced backwards compatibility with PS2 games, it has only Graphics Synthesizer (PS2's GPU). Around 80% of PS2 games can be played. Available only in NTSC regions.
4). 40GB - can't play PS2 games at all (all PS2 chips were removed), has 2 USBs instead of 4, no memory card reader, has wi-fi. Avalable in black and white colors. White is on sale only in Japan. Uses 65nm technology (lower power consumption). Improved cooling system.
5). PAL 60GB - reduced backwards compatibility with PS2 games. it has only Graphics Synthesizer (PS2's GPU). Around 80% of PS2 games can be played.
Backwards compatibilty check:
Europe - http://faq.eu.playstation.com/bc/
US - http://www.us.playstation.com/Support/Co...

Answer 2

The 80GB PS3 has a chip in it that runs the PS2 games. The 40 GB version has been made cheaper by both decreasing memory size and removing this chip.