Videora Ipod Converter.
Shame I didn't find this thread before I spent hours buggering around with Sony Vegas Pro to no avail. Then I tried Videora. It has a really ball aching interface but does the job perfectly. Even converts matroska files.
Not sure if it relies on your previously installed codecs or not but nevertheless it works for me everytime.
My hero so to speak.
I always use the following settings: -
iPod Touch 2ndGen settings (H.264 480x320 768kbps Stereo/128kbps)
Produces good quality - no lag - no jutter.
Jutter?? lol - I meant Jitter