Finally got the USB sound card I ordered so now I can work around my broken microphone jack and get some sound when we stream MHP3. I worked out some bugs with it and played around with the resolution and bitrate, so now we have decent quality overall. The video itself is a bit fuzzy, but it doesn't lag up as much as it used to - as least thats what I think.
If you go on the Livestream page you can see there's three tests. The first had the original resolution (4:3) and 400kbps with keyframes every 2 seconds. The second has the native PSP resolution and 500kbps with keyframes every 1 second. The last has the same settings as the second, except...