as best I understand it, when you run a game with that option selected it will check for a MC (it's named after the game) and if none is found it creates a MC image with the games name, if one is found it auto sets it as the current MC... it does that for EVERY game..it's like haveing a whole MC for each game

 

When updating to ePSXe 2.0 or newer, remember to set CPU overclock to 1x in Options, otherwise ePSXe may crash.
As for individual memory cards it's as dpence said.
With this option enabled, ePSXe will create two new memory cards for each game, if said memory cards already exist it will simply use them.
You can find theses memory cards in your memory card folder in games folder.
The files will be named after the game region code, eg SCUS, SCES, SLUS.
Like
SCUS_941.98-00.mcr for memory card in slot 1
SCUS_941.98-01.mcr for memory card in slot 2
This may make finding specific save file hard but i personally prefer this option, PSP and PS VITA do this to.
Thanks to this i never have to bother with managing my saves files as each game now has 15 or 30 blocks if it supports both slots.

As for transferring old saves it's easy, you can change this option as well as the memory cards on the fly.
So start and load the game you want to save transfer, then press ESC to exit the game enter the memory card setting and enable "use individual memory cards" go back into your game Run - Continue, and save your game to the new memory card.
Rinse and repeat for each save/game.
You could do it via memory card managers like MemcardRex 1.8, but as i said you would have to know the games region code to find the right files, and you still will have to run the game for ePSXe to make the files.

 

Thanks guys for the fantastic info. I would never have figured that out on my own.
I ended up using the save game profile instead of individual memory cards. This allows me to use the same old memory cards I have already made. It takes a minute to set up as each memory card must be initially loaded before launching a game. Once that is done I save the game profile.
Now the emulator automatically loads the memory card(s) associated with said game when that game is launched.
And I don't have to sweat the greasy kid's stuff of having to figure out what region code goes to what game and where my saves are. And that makes PS gaming so much more uber nice!!

 

I tend to launch ePSX from a front end and I use this command line to give me a game specific memory card -

-loadmemc0 F:\Emulators\psx\psx2.05\memcards\%romname%.mcr -loadbin %rom% -nogui

%romname% is the title of the game
%rom% is the full path to the iso.

ePSX creates the memory card if it can't find it.