If extensions are hidden and assuming XP, unhide in tools/folder options, click view tab and untick hide extensions for known file types. Seems that you're in fact unpacking the ISO itself. By exposing the file extension you'll see whether this is the case or not, seeing as winrar recognises an ISO extension, you may well be unaware of this. Just drop the iso file in the iso folder on your psp.
Of course, I could be way off with this, but it seems likely.