How to compress your own songs:

I will give you all a couple of links to obtain some freeware MP3 compression software....
You can use these to get small MP3 files to use with the newly released PSPTunes app by bigbondfan at this website.

You must download both files, then put them together to use.
Kind of complicated getting it all set up...but works just as good as the Goldwave (Not Freeware) app 
Can get you small size 16kbit 11.025kHz stereo MP3s that work great on the PSP.

1. Lame encoder:
http://mitiok.cjb.net/
Get the 3.96.1 stable version from this page

2. Razorlame - a frontend GUI for the lame encoder:
http://www.dors.de/razorlame/index.php
Get the latest 1.1.5a release

These are both zip packages. Unzip each...and combine them together in one folder on your Windows PC.
Start up RazorLame.exe to begin.
Then...go to Edit - Options and make sure the path to lame.exe is defined...can browse to it...
Note - (you had earlier combined lame.exe in this same folder as RazorLame.exe)
Press OK when ready.

Then, go to Edit - LAME Options and move the Bitrate slider to 16 kbit
Select a Mode of "Stereo"
Define an Output directory that you wish....do not make it the same as the input directory.
Now, go to the Audio processing tab.
Select an Output sampling frequency of 11.025 kHz
Press OK when ready.

Now you are all set up...just use the Add button to add your MP3 files.
Then use the Encode button to begin processing.
(Note - Make sure your Output directory you chose in the LAME options
above is not the same as the directory where your original MP3 file was located.)
You will have to copy the songs to PSPPOD/MP3_Additions and also edit the xml file called playlist in itunes folder with notpad

Overall...a bit tricky to get setup and working right...but works great...and is all freeware.

Credits
-------
PSPTunes was developed by bigbondfan with help from developers at the
pspWxp forum.

Thanks to TombstoneTim for the music

Thanks to the betatesters:
crazyiom 
TombstoneTim 
rekuss 
Realworld 
mbarry 