As many of you who have encoded your videos in the MPEG-4 format know, the PSP is limited to resolutions that don't take full advantage of the PSP's 480 x 272 screen. Many users have unsuccessfully tried to get video to play at this resolution. Sony appears to have put some sort of hardware limiter on the MPEG-4 playback functionality, perhaps to encourage sales of UMD-Video. From what I understand, UMD-Video is far, far higher quality than anything you can throw on a Memory Stick Duo.
UMD-Video currently uses the H.264/MPEG-4 AVC codec. Note that this is different from the "normal" MPEG-4 codec.
That could all be changing. A Japanese company called FujiWork today announced the first consumer-level digital video recorder that supports realtime H.264 encoding. Moreover, the player features a Memory Stick Duo slot. For us PSP users, this means that there is now a simple way to record H.264 video DIRECTLY to a Memory Stick Duo.
