Are the older Console games being carried over to the PS 4 or being used with digital downloads?

None, all downloads most likely, or their pie in the sky cloud service thing if that ends up happening.

Luckily, PS1 and even PS2 emulation is pretty good for most games at this point. I'm able to play most of my PS2 library (legit discs) on my PC nowadays with few issues.

we will find out next week i guess

PS1/2 games can easily be emulated on the PS4 if they do the work, no cloud needed

Its not a simple flip a switch when emulating unfortunately. They have first get an emulator running on PS4 hardware then every game needs to be tested for their individual quirks. This has delayed several releases of PS1 and 2 Classics on PS3 and why some games haven't come out. PS4 is a total reset on that work. It would be nice if they get some obvious favorites running. Just go down the most downloaded list and make those available. Gets some older games on the console without the "cloud".

PS1 games may work. They worked in all PS3's, I don't see why they would drop that now. But I wouldn't bet on it.

I don't think PS2 games will work on the PS4. If both PS1 and 2 games work on the PS4, then I will be sold.

PS3 games will not work on the PS4. You'll have to play them with a PS3 or through the "cloud". I doubt the latter will work as well as it should (ie as well as an actual PS3) for those with anything less than a tremendous internet connection, so keep your PS3 or buy one if you haven't already.