UPDATE #2: Wow! 0okm has already released a proof-of-concept application which mounts ISOs to the UMD Drive! Although the emulated games can't be loaded as yet, it's only a matter of time before this feat is accomplished. And no, we will not host the file on our own servers, sorry.

As always, we are reporting this because it is big news, not just for pirates but for the normal public as well. This is one of the first few kernel-mode applications for firmware upwards of 1.5, and we could hope for a lot more 'legal' homebrew in the time to come...

Success Emulate UMD on FW2.60:
Open and Read ISO file by

SceUID fd = sceIoOpen("disc0:/xxx", PSP_O_RDONLY, 0777);
sceIoRead(fd, buffer, size);
sceIoClose(fd);

TODO:
LoadExec ISO by

sceKernelLoadExec("disc0:/PSP_GAME/SYSDIR/BOOT.BIN", ¶m);