At pspiso, you can download isos and csos. You need a custom firmware to play them.
(psp-hacks.com) After you get ur firmware, put the isos, or csos, in an iso folder on your memory stick
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No, the memory stick is the only way to store the files you want without interfering with the PSP's systems, which will definitely permanently screw up your PSP.
Some games can be played from the memory stick on the PSP. Downloaded games and demos from the PlayStation Store show up in the memory stick section under games.