Are you running on custom firmware or on official firmware?If it dosen't show up on the game folder on the xmb,it means that you are on official firmware and it will not let you play it.Only custom firmware running psp's or "hacked" psp for a better term will play iso's and cso's.
Did you format the memory card thru your PSP? System Settings>Format Card. When you format there should be a folder call "ISO". This folder is not inside your PSP folder but instead in the root of your memory card. After you format put your cso and iso files into the ISO folder. Then go to Game, Memory card, and it should be there.
The memory stick dosen't need to be formatted.For all I know,you can go to the root of your MS when it's in USB mode and create the folder there,just make sure the letters are all caps.CSO's and ISO's both work,so there's no point to get a PSPISO Compressor unless you don't want to deal with occasional skipping or framerate drops.
