PSPs with firmware version 1.0 or 1.5 can run homebrew games (such as nintendo, sega, atari, etc) and also can load ISOs of all the current PSP games.
PSPs with firmware version 1.51 and 1.52 currently cannot run homebrew or load psp games, but there is a lot of talk about a firmware version downgrader being released soon.
PSP firmware version 2.0 just came out, and it has the new web browser and other cool features like changing your background, but
basically, if you buy a PSP, make sure you get a v1.5 off of ebay so that you can run homebrew games and such as well as PSP games =)
For more information:
www.pspupdates.com