I have a PSP 2000 with firmware 3.95. Over the last month I have been struggling to create videos for my PSP using Ubuntu Hardy Heron 8.10 . I did manage to create a few videos, using PSPVC, but the audio seemed out of sync. Finally after a lot of trying I found a solution that seems to work for me and encodes faster too.
Following the guide on this page did the trick for me. AviDemux2.4 allows me to convert videos to H.264 format for the PSP in 720*480 resolution. You dont need to follow the entire guide - just till the installation is complete. Then the Auto PSP full res option should work properly.
Oh, and in case it still doesn’t work for you, I remember doing this before installing AviDemux. Not sure whether it has any impact on AviDemux.