they come in a form of a folder, but need to be made into an iso using umdgen. (
www.psp-hacks.com). To shrink the size down, you need to know what files you can delete, generally you can delete the 'update' folder, if it has one. Also you can size them down by getting the smallest video file from the game, and renaming and replacing the other larger ones. This can bring down the size a lot. Also there is sometimes a 'dummy' file, which can be removed. Some games dont like to be changed and wont run after you make the changes, others are ok. Try a google search for 'psp rip kits insertgamehere' and u should find one.
What game are you trying to shrink?