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I'm not exactly sure, but it sounded like you were asking: "how can it have played all 26365 frames and yet drop 1635? Wouldn't it have only played 24730 frames?" And the answer is: no. PocketMVP has to "play" each frame, but if it's running behind, it will drop (ie. not display) frames in order to try to catch back up to where it should be.
Settings I've been playing with: 230 Kbps with DivX seems to work really well so far, and gives a nice trade-off between high quality and file size. I may try the 218 that red-i is using when I get back home.
Encoding for portrait view, I leave the framerate alone - PocketMVP is able to keep up (I have some videos at 30 fps with 0 frames dropped) just fine. And converting to mono audio works great while still staying in sync (mono gives a much smaller file than stereo).
Encoding for landscape, this is where I have to decimate the framerate. Even at 400Mhz (I haven't tried any of the "overclocking" utilities yet) either the PocketPC and/or PocketMVP simply can't keep up yet. It can get 15 fps just fine though. And as red-i and I have been through, so far stereo MP3 (low bitrate seems to be fine at least) audio is needed to stay in sync.
A trick for Quicktime source videos: Decide ahead of time if you want to encode for portrait or landscape view, and when you export to .avi - set the framerate to either NTSC 23.97 fps or 30fps, whichever you want. I typically use NTSC for portrait. For landscape though, set it to 30 fps because you will be decimating the framerate in VirtualDub. It sounds like a small difference, only 2 to 3 fps, but the difference between 12.x and 15 fps is very noticeable. Also, if you have the hdd space, encode both audio and video uncompressed. It chews up a ton of hdd, but gives you total control and full quality in VirtualDub.
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