I use
Handbrake for all my encoding, I just use the default High Profile setting. Each movie ends up somewhere between 1 and 2G in size and takes anywhere from 1-2 hours to encode. Looks great on my iPad and on my home theater system. For me, the convenience of encode once, play anywhere outweighs my storage concerns.
I'm not familiar with the application you're using, but you might want to check their support forums and see if there is any discussion on settings for the iPad using that application. Handbreak's support forums has some lively discussion about tweaking settings to what is "best" but I think you could spend far longer tweaking movies than watching them.