The rumors, in this case, were true: There is a 40Gig PS3. It will cost less than previous models. And it is not backward compatible.
The new model PS3 will be available in Europe on October 10th.
The new PS3 features upgradeable firmware allowing "new features and functionality to be added to the system as time progresses." A recent firmware update, for example, enabled PS3 to upscale DVD’s played on the system to full 1080P High Definition.
The introduction of the new PS3 has been determined following user feedback from thousands of existing PS3 owners as well as research into future potential PS3 owners. The new model features two USB 2.0 ports rather than four and no longer includes the multi memory card port.
According to Sony, "The new model is no longer backwards compatible with PlayStation®2 titles, reflecting both the reduced emphasis placed on this feature amongst later purchasers of PS3, as well as the availability of a more extensive line-up of PS3 specific titles (a total of 65 titles across all genres by Christmas)."
TheFeed is batting .500 when it comes to big rumors. We called Bungie/Microsoft wrong (and still can't fully believe it) but we got the PS3 European price cut correct.