I think it's just modifying the PSX ISO as usual and then going through the normal process of converting it for the PSP. I could be wrong since I've never tried anything like this.
You're right. You can play any (or almost any) PSX game on the PSP as long as you have CFW and you convert your .ISO's to .EBOOT's. That and Popsloader and the right version of Popstation. It's all very easy when you know how, there are some amazing guides about how to do this online.
My favourite FF to play on the PSP is Final Fantasy IX, only because it wasn't released for PC. I could use ePSXe but I much prefer being able to play it handheld.
If you own a 16GB memory stick like me, you can have an awesome library of all your favourite PSX games (not to mention SNES, Sega Mega Drive, GBA and N64). In my opinion, having a PSP and not having any of these emulators or CFW to play all your old favourites is a CRIME!