It doesn't "emulate" the PS1, it's simply able to play PS1 games due to similar hardware and (hacked) official Sony software. I've been able to play almost everything I've thrown at it (FF7-9 included), however I don't think everything works. Look into POPSLoader for improved compatibility, it can really help getting some games running. I'll list a few good links below (too many for the "Attached link" section I believe.
GBAtemp Tutorial on Conversion:
http://gbatemp.net/t206195-guide-to-converting-ps1-games-for-psp
Compatibility List:
http://www.gamerspress.com/index.php?title=PSX_on_PSP_Compatibility_List
POPSLoader Tutorial:
http://forums.maxconsole.net/showthread.php?87901-Popsloader-Tutorial.
That should be enough to get you...