What's the highest resolution QuickTime video that will sync and play on my iPod?

Current iPods support video playback and have a screen resolution of 320x240 pixels. Therefore, Apple sells videos at 320x240 pixel resolution on the iTunes Music Store. In addition, if you convert an existing QuickTime video to an iPod-friendly format using QuickTime Player, you'll quickly discover that the default "Movie to iPod" settings also produce video at 320x240 pixel resolution.
Sometimes you may want to watch a video you've imported into iTunes on your Mac, and not just your iPod.  Obviously, it'd be nice if the resolution of the video could be higher than 320x240. Can you make a video file higher than 320x240 pixel resolution and still have it successfully sync and play on your iPod? Yes.

Video Codecs
The hardware and software supporting video playback on your Mac is obviously very versatile.  Therefore, iTunes can support a wide variety of different codecs, including popular codecs like Sorenson Video 3 and MPEG-1.  iTunes can also support very high resolutions for any given codec, too.  However, the iPod's capabilities are a bit more limited.  As a result, while iTunes will permit you to import and play a Sorenson Video 3 video at 640x480 resolution, it will refuse to sync this sort of video file to your iPod.
A close reading of the technical specifications for the current iPod reveals that the iPod supports two video codecs:

• H.264 (up to 768 Kbps, 320x240 pixel resolution, 30 fps)
• MPEG-4 (up to 2.5 Mbps, 480x480 pixel resolution, 30 fps)

H.264 is the more advanced codec and can compress video at any given resolution and frame rate into a much smaller space than MPEG-4.  Apple prefers H.264, since it keeps video sizes on the iTunes Music Store smaller and downloads quicker.  However, this more efficient compression comes at a price: it takes more processing power to decode and play an H.264 video than an MPEG-4 video.  Therefore, while the limited video hardware in the iPod can handle decoding MPEG-4 video at 480x480 pixels, it can only deal with H.264 video at 320x240 pixels.
Your Videos
H.264 is Apple's "default" video format for the iPod in QuickTime Player.  For example, If you convert an existing movie in using the "Movie to iPod" setting under File > Export, you'll produce an H.264 video at 320x240 pixels at 30 fps.
If you're not planning on transmitting your video over the Internet, the size of the file is probably less of an issue. As a result, you can use MPEG-4 instead of H.264. You will end up with a larger file - but you will also produce a higher resolution video that'll still play on your iPod.
If you're interested in real numbers, I experimented with Green Day's "American Idiot" video. While the H.264 version at 320x240 took up the 19.4 MB, the MPEG-4 version at 480x360 took up 56.8 MB.
Instructions for QuickTime Player (Pro)

1. Select: File > Export...
2. In the Export pull-down menu, select "Movie to MPEG-4" and click "Options..."
3. In the Options window, change the File Format from "MP4 (ISMA)" to "MP4."  Use "MPEG-4 Improved" as your video format, "Custom" as your image size (480x360 pixels for a 4x3 aspect ratio video), and set your Data Rate at approximately 2500 kbits/sec.