Yes, it's true. I've managed to run Windows 95 and Linux on the PSP. I've done it by porting the excellent open source x86 emulator Bochs.

Windows 95 actually runs quite well but don't expect it to be a speed demon (windows is sucks!!! unix is the best) . It takes about 12 minutes to boot but afterwards it's pretty usable. I was able to do things like: open "My computer" and browse the virtual hard drive, complete a whole game of Minesweeper and run various other applications. Now you too can get your Minesweeper fix on the go

I've also tested DLX Linux which comes pre-packaged with Bochs and it works just fine. However, I couldn't do much with it because there's no keyboard support. If you want to do your word processing on it then wait until keyboard support is implemented (though I doubt it will be any fun using the joystick).

In windows, mouse handling is extremely difficult. I suspect it has something to do with the "boost" feature windows has. Once you get the mouse moving it will keep moving in that direction even when you're trying to move to a different direction. The solution is to counter the movement by moving to the opposite direction. It's sort of like trying to push the mouse the other way in order to stop it.