Is it possible to use PS1 games and USB simultaneously? I thought the USB was handled by the B/C chips.

That's true; network too. Can play digital backups (off USB/Eth) only by using POPStarter (for those unaware, POPS being Sony's PS1 emulator ripped off the single game that was officially used on). Although POPS isn't really that good (was used, experimentally, only once afterall), USB throughput isn't an issue.