A firmware update will be on the memory stick. But is in the PSP itself. Meaning you can delete the update from your memory stick and you'll still have the update. So it's a mix of both.
To make it even esier to understand, you download the update onto your memory stick, and then install it onto your PSP. The PSP doesnt need the memory stick for the firmware to work right though.
Need the memory stick to save it on. Then you install onto the PSP, then can delete the update file itself later on. You'll still have the firmware after deletion.
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