High quality (slow).
It searches for motion, and will only update those parts of the picture that have changed since the last frame. A whole new frame is only displayed at each I frame. This is how MPEG compression works, and this setting defines how accurate the search should be. (Apparently) there is no difference in quality between High and Highest, but the filesize is larger, which is why this setting is used in the KVCD templates.
I think this is how it works but Kwag could probably give a better explanation.
