I have the original PSP.
Yes you have to convert the videos into either mpeg4 or divx format for you to be able to watch on it. After conversion, the videos need to be stored under a specific directory on your memory stick. So far, my 4GB memory stick stores about 8 full-length movies in divx format.
The volume for mine is the +- bottoms on the bottom of the screen.
The start up can be slow. Try to download the latest system updates. You can connect your PSP wirelessly to the internet to download. Or you can download the system file on your computer and hook up your psp to computer.
I heard that Skpe is working with Sony to come up with a PSP internet phone, and this will be an interesting accessory!