Two words: jaw dropping. Check out this demo (double click to go full screen!) by Fabio 'I eat codecs for breakfast' Sonnati. Encoded at a mere 500bkit/sec this demonstrates just how well the H.264 codec can perform at low bitrates. Check Fabio's blog for more details and watch out for more upcoming demos.
I wonder if he will share his encoding settings with us. One thing I can guarantee already is that he set smoothing to true ;-)