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well for me..i tried many movie conversions for my psp. and the one that really made a big difference in quality was psp movie creator. its cool cause u can select the bitrate and also u can select how u want the movie to be. for example u can make movie letterboxed, 16:9 ratio, 4:3, etc. i think u should give that one a shot. and also for movies to work on psp they need to be mp4 format. so movies with the m4v do not work. so u have to reconvert those using freeware like psp video9, which is really good also.
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