There is an article floating around that states that owners of PSN-purchased software can share it with up to 5 people... Is this really legal/possible?  If so, that sure makes PSN purchases cheaper in perspective.

If this is possible, in a nutshell, how does one go about transferring the game?  Can I send it electronically, or do I need to move it to a USB drive and transfer it that way?

The Article:

http://gamingghouls.x10hosting.com/2009/03/why-does-sony-condone-game-sharing/

Get one of your friends to make a new PSN account
Get them to sign up for PSN, when they click "SIGN UP FOR PLAYSTATION NETWORK"..
Instead of making a whole new PSN, select "sign in with an exisiting account"
give them your email/pass that you used to sign up on (or where you purchased that item)
when they are on your account from their PS3, go to the PS Store, go to recent downloads, and there it will be, whatever you bought/downloaded will be there.
After downloaded, DO NOT, I REPEAT.. DO NOT delete the account they got the item off of, like keep it on your PS3, if you delete the account from your ps3, whatever you downloaded won't work.
Example : My friend downloads the CoD maps, if he deletes the account off his ps3, he won't have the maps anymore.

Smashed basically explained it all for you there

but be careful when you are doing it!