Use the psp to format the 4 gig memory stick
the psp will not see any thing over 4 gigs unless you are using a firm ware that is higher then 3.03 (custom firm ware by dark alex and normal firm ware by sony)
also it will only play MP4 video not AVI or any other sort.
the video directory is (ms root/ video/ video folder/ sample.mp4
if your psp will not see the memory stick at all make certain it is Magic Gate compatible and try pulling it out and reinserting it repeatedly a couple dozen times and then see if it will read.
if it still dont read replace your psp (Hint it will display your free space if you go down to memory stick in the psp XMB menu (regular menu) and dont click on it if space is displayed it is most likely user error.
music folder is for folders that contain mp3s
picture folder is for folders that have photos.
you cannot just drop all files on the root of the memory stick. they must be put in the proper folders
using the psp to format your memory stick will create the proper folders you must put the files in the proper folders created by the psp.
Hope this helps!