Instructions
Download the movie file, or rip the movie file from a DVD you already own. To do this you have to use a DVD-decrypting program to take a movie off of a DVD and turn it into a movie file on your computer.
Convert the movie file into a format that can be played back on the PSP. MP4 is the proper format for PSPs. If your movie file is not already in that format, you will need to convert it using a PSP converter program.
Download a file compressor software. YACC (Yet Another CSO Compressor) is a free program that is used directly for compressing PSP files. I would recommend downloading that compressor.
Choose the compression level you wish to use, the highest being level nine. Which level you choose will decide how much smaller the file size will get. Understand that the quality of the file may get worse, depending on the higher compression level you use.
Right-click the original movie file and the file that you have compressed, and click "Properties." Check the file size of the compressed file to make sure that the file has infact become smaller.