You can save directly to the hard drive.
You have to go into the dashboard and create a "virtual memory card". After that, it works just like a PS1/PS2.
Don't count on bringing in old PS1/PS2 saves just yet, though...you need a bloody adapter that they decided not to have out till sometime in December. The files are a .psv format, and I couldn't figure out any method to convert old saves and get them onto the PS3.
Stupid adapter....DIE SONY!