Tim
Um....well actually PiP capability is/was part of both standards. PiP has been part of the BluRay standard since day 1 as well, but it was an *optional* part of the standard, players didn't *have* to support it, though they could if the manufacturer wanted to. The reason for BD Profile 1.1 is that PiP is no longer an optional component, and so all new BD players from November onwards must support it.
HD-DVD players manage the PiP trick using two audio/video decoder units in the player. BD Players that are PiP capable will in general use two decoders as well, though the PS3 has the processer power in the Cell to handle it in software instead. BD profile 1.1 simply mandates that manufacturers include this capability
Both BluRay and HD-DVD formats have supported PiP since day one, both standards included the capability. Few if any actual movies have offered PiP capability, so it was pretty much an irrelevant tick mark on the feature list.
BTW one interesting aspect of this is the fact that two data streams are decoded simultaneously. Two streams, each demanding some data bandwidth. BD players offer significantly more data bandwidth than HD-DVD players do. So truly BD players are in a better position to handle the playback of Pip and maintain picture quality. HD-DVD media that supports PiP will have to ensure that the encoding of the main feature and PiP elements are at low enough bit rates to stay within the bandwidth available to HD-DVD players. Otherwise consumers will experience frame drops, skips or freezing. Ick.
The 256MB local memory requirement is in the form of HDD or flash storage and is there to handle storage of media updates. PS3 will be fine, BD profile 2 requires 1GB of this kind of local storage, and PS3 will have no issues there either. The only other difference with Profile 2.0 compared to 1.1 is the requirement for an Internet connection. Again PS3 should have no issues. That said, I am still not convinced that having Internet connectivity on your HD-DVD or BluRay player is of any use to anyone except the manufacturer being able to sent firmware updates.