I am an anime fan and I wanted to watch anime on my PSP in Japanese with subtitles. After a bit of searching and some trial and error I've found that you can use PocketDIVX to make an AVI with subtitles encoded in the video from a DVD. You can then easily use any PSP video converter to encode the AVI to a MP4.
You will need DVD Decrypter, PocketDIVX and PSP Video 9(or your preferred video converter). You will also need 10-15GB of free space (depends on the size of the video file you are converting) on your hard drive.
First, rip the video to your hard drive using DVD Decrypter.
-Open DVD Decrypter and go to the Mode menu and select IFO.
-Next go to the Tools menu and select Settings. Under the IFO Mode tab set File Splitting to none. Close the setting dialog box.
-On the right you will see an Input box with a list of VTS_01, VTS_02 etc. Open these and find the PGC that matches the runtime (check the run time using a DVD player) of the movie or episode you want to rip. (If you want to save some file space you can deselect the chapters for the opening/ending credits/next episode preview, just find out which chapters they are using a DVD player.)
-When you find the correct one select it and click the big DVD-to-Hard Drive button.
-Don't forget to write down where the file is being saved!
After DVD Decrypter is done open PocketDIVX.
-It will ask you to select a target device. Select the Archos (fourth from the right) and select the AV400 series model (second from the right). Just click ok for the box about the dimensions.
-Next go to 1 - File to encode, click the folder icon and find the VOB file you just ripped. You will be asked to select an audio stream. Pick the language you want (if there is more than one for the same language pick the first).
-Now to add subtitles. Again go to 1 - File to encode and now click the subtitle icon (the little monitor with "ABC" on it). You will likely see several choices for the language you want, just go with the first one (it is usually the correct one).
-Next under 3 - Output options set the video quality and audio quality to max (199 and 9 respectively). You can leave the Sound boost at 60% or set it to 0% if you'd rather boost the sound using PSP Video 9. I recommend setting it to 25%.
-Under 4 - Encoding tasks management click Advanced Options and make sure Use 2 pass encoding is checked.
-To make sure the subtitles are in the video and correct click Preview (at the bottom left). The subtitles will be a slightly transparent grey with a black outline, this is normal and as of now can't be changed. If the subtitles are incorrect go back to the subtitle selection and try a different one. There is a bug where sometimes the subtitles do not appear in the preview. If youre sure they are selected, encode the video and check it using a video player (Windows Media Player works fine).
-Lastly click Encode Now.
Finally you can use PSP Video 9 (or your preferred video converter) to encode the video for your PSP. Just be sure to rename the file before you encode it or it will show up as VTS_01_1_Archos in the PSP. You can find a couple of excellent guides on using PSP Video 9 here: http://www.pspvideo9.com/started.html