I think it is your conversion software that is doing the scaling. There should be a checkbox or an option in your software to "keep existing aspect ratio" then when it re-encodes at 480x320, it will put filler bars at the top/bottom to keep the 16:9.

 

I use Allok video splitter and it works just fine. Just choose any converter which has "iphone" option. once converted for iphone or ipod.. it works awesome on our hero's