i have an ati hdtv wonder as well, and it can record in BOTH mpeg2 and mpeg4, but the mpeg4 option sucks. it can only do mpeg4 ASP codecs, meaning you are pretty much limited to xvid. now because you are recording on the fly, it only does a 1 pass encode, and it just looks really crappy and is not very good at compressing. i mean, you can use it for just short term storage, but unless you are really pressed for hd space, you should just record in mpeg2 (which is like its native raw format).
if you want to do h264 encoding, you cant do that with a hardware chip, you have to do it by software after the fact. right now, h264 encoding is pretty complicated if you want to do it right, but the results are great.
depending on what you want to do, i would just stick with mpeg2. on the fly mpeg4 is not ready yet, and even when it will be, i suspect that it will be lower quality than software solutions.