1. In the PSP Main Menu go to "Photo" and click on the Memory Stick.
2. Now you will see you image. Select and open the image you would like to use.
3. Press the "Triangle" button and then go to "Set as Wallpaper" button and click it.
4. It will ask you if you would like to set as wallpaper or overwrite current wallpaper. Click "Yes".
5. Now go back to your PSP Main Menu and you should have the new custom wallpaper as your background.
