I got the official word on the update from IGN.com
PS3 Updated to 1.50
Backwards compatibility issues fixed in latest firmware update.
by Jeff Haynes
January 24, 2007 - PlayStation 3 owners have become accustomed to downloading firmware updates for their console, taking advantage of new features like full screen video playback or revised Network services. Earlier today, Sony released the latest update for the next-gen system. Version 1.50 features a number of improvements to the console, such as the ability to take a photo and turn it into your user icon. This should give you a lot more flexibility if you've gotten tired of the smiley faces or stick figures for the system.
Users can now choose to turn the key tone that you hear as you shuttle between options on and off, and you now have the ability to delete your backup data on your system. Another important setting that has now changed for wireless connections is the inclusion of WEP 128, WPA-PSK (TKIP) and WPA-PSK (AES) as additional security methods that can be used with AOSS. For people that want to enter Korean via the PS3's on-screen keyboard, version 1.50 now provides support for that language. Finally, the way that you can save your password and sign in automatically via the PlayStation Network has been changed, with two separate options for users.
Japanese PS3 owners now have the ability to purchase content for their PS3 via the EDY system. This gives owners the option to pay for items on the PlayStation Store with pre-paid electronic money cards via card readers attached to the system via USB cables. Information on EDY sites even hinted that future support might allow purchases of content via cell phone. A specific EDY viewer is installed onto the PS3 to update balances of your cards and alert you if the balance is running low. However, North American owners don't have access to this new feature at all.
By far, the most important upgrade thanks to version 1.50 is the inclusion of improved backwards compatibility. PS3 owners cried foul (and rightly so) when they booted up their systems with PS2 titles and ran into pixilated text, texture tearing and a host of other visual issues. Thankfully, version 1.50 repairs all of these flaws with your titles, so you can experience your older PS2 games the way they were meant to be played. While the PS3 still downscales from higher resolutions to 480p when it's playing a backwards compatible game, the difference in clarity is striking.
As an example, we put Final Fantasy XII in a PS2, a PS3 that hadn't been updated, and finally a system running version 1.50. Make sure you pay attention to the facial details and textures within these clips from system to system.
We'll have more on future firmware updates as they're released.