I would recommend installing Dark_AleX's latest custom firmware: 3.02 OE-B.
There's a very good guide here:
http://www.psp-spot.com/forums/TA-082-down...E-B-t32213.html(Start from below "MAKE SURE YOU SAVE THE 1.50 UPDATE FILE IT IS IMPORTANT THAT YOU DO")
It lets you load ISOs from the XMB, play real UMDs and run almost all homebrew.
It also has a recovery mode and stops you accidentally upgrading your firmware.
And it has most of the 3.02 firmware features (including PS1 emulation).