Custom firmware is firmware that has been modified using elf files to load prx files in firmware to let the user manipulate firmware.
Custom firmware can be very useful because it can revive bricked or partially bricked PSPs it can also load homebrew applications on start up and gives you the option of changing backgrounds and gameboot files without the chance of bricking.
I am not sure if custom firmware has been emulated yet but theoretically all you would have to do is make a dump of 1.5 and add the custom firmware files to it.
I think in the future it will be possible to load 8gig mem sticks using customfirmware if someone can get the PSP to utilize fat32 instead of fat16.
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