The MP4 video format has become to this day the most versatile video format available allowing impressive quality and powerful compression.  All MP4 codecs work roughly in the same way, by only displaying actual movement within a key frame and keeping pixels that don't change from frame to frame.

Proper Encoding starts with a source file, be it MP2 (VOB) Mpeg-1 (VCD/.mpg), etc. then you will need the proper codecs to do yoru encode such as XVID or DIVX.  Currently XVID is an open source codec, it requires no money to use it to encode and can be distributed freely, DIVX is unfortunately not free and costs 39.99 from DIVX both codecs offer about the same quality encodes and most devices that support one will also support the other but DIVX is far easier to use then XVID because all of the codec settings are fairly straightforward and require little learning to understand what each setting does or doesn't do.

Once you have the source file and the codecs you need you must find a 3rd party software program to handle automatically run both passes and automatically dub your audio.  I personally Enjoy using Gordian Knot as it is definitively the easiest to use and has the least of what I don't want, useless features.  Whatever program you buy or download make sure it has the pwer to do both passes automatically (In dual pass encoding the first pass generates a data file as a reference then the second pass is where the video is actually generated, this provides tighter compression as well as improved quality)

Audio- In most cases the audio for a video is embedded in the source file, if you ahve the proper codecs this audio can be left unchanged but for ultimate compatibility and compression this audio should be downmuxed and encoded using a poular audio codec such as MP3, Gordian Knot provides a program called Besweet that allows you to do this automatically in any bitrate you choose.

Generic MP4 like what is used for most MP3 players supporting video is usually always some form of XVID but instead of going through all of the hassle of trying to encode with a full featured program with a large footprint you can use small open source applications such as Iriverter which encode video as very high framerates and are far easier to use.