i was curious about this too, i've seen a lot of peeps at craigslist.org that you could do crazy things with them, but i'm afraid once i install them programs it malfunctions or something
I used to be into psp homebrew/modding. Ive been out of it for a while though, but i know that some mods can render your psp useless if uninstalled incorrectly. If you do everything right nothing will happen, and most programs are safe anyway.
Check out sites like http://www.psp-hacks.com,http://www.gamefaqs.com, and http://www.pspupdates.com (may not be a good link). All of them have forums and stickies etc. that will teach you all that you need to know. You may have to get a certain firmware psp to use any sort of mods though, but ive been out of the game for almost a year now.
Definetely alot more then you'd think. Mod the main page, play all formats of music, play all formats of video, surf the web, run emulators (an engine that is like a virtual game system off the psp, like you can download an NES emulator and play full games off of it, there is also GBA, SNES, Genesis, TurboGraphix, and a HELL of a lot more), play iso'ed games, (rent or borrow a game, rip it onto a memory stick and then play it with an iso loader, i.e. you can get free games), and theres is alot more things you can do buy youll need to go to the websites i posted.