I heard only the 60 GB version plays PS2 games, I have the 40 GB and have never tried, ill have to try tonight and see!

It really depends on the model. Here is a summary.

New Models:
80GB (Model CECHKxx) Not backwards compatible.
160GB (Model CECHPxx) Not backwards compatible.

Older Models:
20GB (Model CECHBxx) Backwards compatible all games.
40GB (Models CECHGxx, CECHHcc) Not Backwards compatible.
60GB (Model CECHAxx) Backwards compatible all games.
80GB (Model CECHExx) Backwards compatible some games.

The older 20GB and 60GB have a hardware emulator, while the 80GB has a software emulator which is the diffrence between the emulator. Newer models have no emulator and less USB ports.

More Information Here:
PlayStation 3 - Wikipedia, the free encyclopedia

Hope this helps!

SB