For extracting and replacing files, I highly suggest using CDmage B5.
If you're going for a huge hack, where many files are altered, then I would suggest simply rebuilding the ISO. This can very easily be done with 'cd-tool' or Sony's 'buildcd' - I don't think buildcd works on Win7+, however.
You'll want to be on the lookout for the following issues:
1 - Games that use check sum integrity (many CAPCOM games use this). In such case, you'll need to write your own check sum calculator and insert the table into the executable before every modification, no matter how big or small. If you replace a file that undergoes check sum integrity without updating the sum value, the game will simply black-out (crash). An alternative to this is to disable the check sum integrity via r3000a dis/assembly. When/if such functionality is located, you can use KC's armips for making the necessary changes.
2 - As mentioned, games that use hard-coded LBA tables (Squaresoft, CAPCOM, etc. use this). It is generally safer, faster and easier for the original developers to use this method, compared to generic PSY-Q SDK functionality. Again, a special tool will be required for such matters. To determine if a game uses an internal LBA table, insert a file via CDmage B5 and play the game to the point where you know when the file is going to be used. If the game doesn't crash, you probably don't need to worry about this. If the game won't even boot, or if the game crashes where the file is used, chances are extremely likely that the executable utilizes an internal LBA table in addition to performing file integrity check sum.
3 - Compression isn't a linear process for PSone games - just about every game developer for every game in existence use their own compression schematics. Yet again, this will require a special tool, only you'll have to reverse-engineer the specifications via r3000a dis/assembly. In any case where you get lucky (if the game/series is popular enough), chances are likely that someone else has already written tools for the cause.
4 - Most, but not all games for the PSone use Mode2/XA formatted disc types. In any other case, modification becomes a true painstaking process where rebuilding the ISO is almost always necessary.
All said, I would suggest starting small - replace a texture or two, see how it goes and eventually work your way up from there.