I encoded a movie for my wife's iPod touch to test it. It's 480x270 (normal widescreen proportions), mp4--the precise format the iPod touch prefers.
When I play it on the Z, it's letterboxed, with black bands on the top and bottom, and the picture is squeezed between them.
Setting the widescreen mode on the Z to On or Off has no effect.
WTF? Any ideas?