You can't play mpgs on the PSP. You have to convert them to mp4. Get PSP Video 9 for free at www.pspvideo9.com and use it to encode movies for the PSP. I use the AVC Firmware 3.3+ profile.
I almost forgot to mention that you MUST put the movie into the correct folder or the PSP either won't see it or will see it but say it's corrupted since it's in the wrong format. To make things easier use the PSP to format the memory stick. This will create all the folders that you need.
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