I don't know what screen set up to use.

I'm in the middle of building my first portable... I realise PS2 is advised against but hey what the heck right? Anyway I've got the console running on a 7.5 sony camera battery, I've changed out the old Volt regulator to a low drop out one. For the speakers I plan to use a set of ipod fold up ones that run on 6/5 volts. I bought a cheap 7inch screen to use for the display, But this is where the problem started, playing a PS2 game worked no problem... But I tried a PSone game and the screen started getting interference in the lower left corner that's if the PS2 read the game at all. At first I thought it was a problem with the PS2 so I played it through my TV via the AV cable, no interference. So I connected the monitor back up and tried playing the game ignoring the interference... After about an hour there was smoke coming from one of the capacitors! I think one of the coils on the back breaking was the cause of the over heat... Now I'm not sure what to do about buying a new screen I need something that can handle both PS1&2 games... Would I be better off going for one that can handle HDMI and using an adaptor or some other kind of setup? Here's a picture of the old screen board... It was the cap and coil in the top right that were on fire.
So I don't know if the cap was the cause of the interference or if it was just the PS2 not communicating with the screen, like I said the Ps2 games worked fine but their a different format aren't they?

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I can't see the picture, but a smoking capacitor shouldn't have anything to do with what video signal the screen is receiving. It sounds like an issue with overvoltage. How are you powering the screen? It may be getting more voltage the capacitor is rated for.
If you want the highest quality, you can use this screen which accepts component (YPbPr) video. It's pretty much the only one that can use component video and it's pretty expensive for that reason. You could also use an HDMI LCD like this one with a component-to-HDMI converter, but that takes more power for the converter. It would look about the same as just using component video.
If you like how the composite video quality looks, there's no need to spend more money. The cheap 7" LCDs do the job well.
I think it was just a bad screen to be honest. I was powering it with the camera battery at 8 volts at the maximum the screen was rated for twelve. I just thought it was strange it was only getting interference from the PS1 games. I can live without component video if it isn't needed but I want to be able to play both PS 1 and 2 games on this... I just feel a bit unsure of buying another cheap one.
A lot of the screens that look exactly the same on the outside use different decoders inside. If you buy another one from somewhere else, it'll likely be different and may work better. I can't ensure that both PS2 and PS1 games will look good on a cheap screen because I've never tried that, but I don't see any reason why they wouldn't.

If you still have trouble with interference later on, using a shielded video wire may be necessary. A standard composite video cable usually has good shielding. Just remember to connect the shielding to ground.