The easiest way to create e-books is to generate a PDF. Windows, Linux, and Mac OS X have different ways of printing your text files directly to PDF, and as PDF is essentially an image format, it is relatively easy to export the different pages of the PDF files into separate JPEG images for viewing on the PSP.
If you're on Windows or Linux, rather than spending all your money on Adobe Acrobat, you can grab a free copy of Open Office (http://www.openoffice.org), which, besides being a fully functional and free alternative to Microsoft Office, has the ability to convert files to PDF. But if the document you want to convert isn't an office or text document, you may still be in luck: if you can print it to a PostScript file, you can use the ps2pdf utility from GhostScript (http://www.cs.wisc.edu/~ghost/) to create your PDF. To print to a PostScript file, configure a generic PostScript printer that outputs to a file rather than a USB or parallel port.
In order to make the pages of your documents easily readable on your PSP with plenty of zoom, I recommend setting the page settings for your PDF printout to 8 inches by 9 inches with 0.3-inch margins and a nice 12 or 14 point font. I have created a special page setting for my printer in Mac OS X that measures 8 inches by 9 inches with 0.1-inch margins around. In the actual document settings, I choose to give the document 0.3-inch margins. Using Mac OS X's built-in PDF support, I print the document directly to PDF.