The story I have heard directly from insiders is that they had a GPU design from Toshiba. But, it was so deeply VLIW that writing an effective compiler for it was deemed infeasible and hand-coding for it would require deeply dedicated skills. So, they gave up on it late in production and went to Nvidia.
They looked at the G80, but that was too early and risky to jump on at the time. So, they settled for the 7800.
It's a shame. If they had delayed the release and went with the G80, the PS3 would have crushed the 360 as far as graphics. Instead, a whole lot of Cell SPU time had to be dedicated to shoring up the PS3's GPU issues to bring it on par with 360 titles.
I heard that the Toshiba GPU was also part of that last minute change after the dual Cell design didn't work out. The Nvidia talks happened sort of in parallel, but that was the last option.
I want to say it's mentioned in The Race For A New Game Machine too, but I'm not 100% on that.
They looked at the G80, but that was too early and risky to jump on at the time. So, they settled for the 7800.
It's a shame. If they had delayed the release and went with the G80, the PS3 would have crushed the 360 as far as graphics. Instead, a whole lot of Cell SPU time had to be dedicated to shoring up the PS3's GPU issues to bring it on par with 360 titles.