Though I haven’t been able to figure a way to get an H.264 encoded file out of Compressor 2 that will load onto the video capable iPods, I have been able to encode valid MPEG-4 files that work. I’ve found that 512 Kbps works well on the iPod. This setting doesn’t look as crisp as H.264 encoded material, but is passable on the small screen. I don’t consider it acceptable for NTSC display.
Pictured are the settings I use. Don’t forget to resize the material to 320×240 in the format tab (circled).
It’s surprising Apple hasn’t released an update to Compressor 2 to address the H.264 shortcoming. I would expect one shortly.