The first thing I'd try is to just run the raw, unconverted image that you downloaded. Most of the time, even if it's in some other format like .bin, .mdf, .img, etc., it'll usually work because these formats are essentially the same and contain the exact data on the cd, but may have a slightly different header on the file. The emu just seems to ignore this and run it without any issue. You can always try renaming it to *.iso or *.bin, but it shouldn't make a difference really. If you want to compress the iso, just do like scoutme said, but be sure to include the *.table file along with the compressed iso. Oh, and also make sure you are using the proper BIOS image and that it's named SCPH1001.BIN (the caps are critical and caused me a lot of problems earlier). Good luck and happy gaming!
*Eagerly awaiting the next zpsx release*