I use iPod High Resolution settings; the iPhone settings gives me a bad quality when I zoom on my widescreen movies and I don't really mind ending up with a bigger file; I won't need to encode it again in an eventual future!
In order, I click :
1. iPod High-Rez preset
2. MP4 file format
3. AVC/H.264 codec format
4. Framerate same as source
5. x264 (h.264 iPod) encoding profile (why it choose the Main profile even though I selected iPod High-Rez is BEYOND me)
6. 1500 kbps average bitrate (default with this preset)
7. And I am keeping the 640 x 480 resolution (which chop the movie to a 640 x whatever height it needs)...
Lots of thoughts there. Generally, H.264 gives equal-quality video at lower bitrates (and smaller file sizes) than Mpeg-4. Most of us think 600kbps looks great. Also, crop your videos to fit the 480 x 320 screen - otherwise, you're just wasting space.
Ok here is a different type of question. I converted the movie and used the ipod touch settings. I put it in my itunes library. It wont sync it though. Is there something special I have to do?