Grab the new Handbrake 0.9.0 user the presetting for iPhone on the side. Change the bitrate to 2500 and rip away.
Looks fantastic and takes about 45min with a 2.2Ghz MBP
2500 bitrate? You're wasting a phenomenal amount of space there. For a 480x320 display (which would be 480x204 in a 2.35:1 aspect ratio, which is bordering on standard at this point) and H.264, I wouldn't bother with anything higher than 1250 or so for the video, and 192 audio in stereo AAC. Anything higher than that for video, and you're not going to notice the difference. Even at full resolution, 1500 is about as high as I'd bother with.