What are Video "Profile Formats" or "Levels"?

[HanDuet]

Greetings!

Complete noob to these forums, but thankfully not to video files and converting! I've been happily playing around with file conversion over a few years now, learning little by little about good converting programs, file formats, resolution, bit rate, etc.

Recently, I've come to a point where I'm trying to do more than just convert videos to play on my iPhone 3GS, but I'm wanting to optimize them as much as possible to get the highest quality possible in the smallest file size.
So far, I've been using MediaInfo to give me detailed information about my source file, then converting the video with Format Factory (v2.50) to my desired specifications.

Along the way, I noticed a bit of information provided by MediaInfo that I didn't recognize. Near the end of the "First video stream" description (within Basic view), there was a section that read something like: "(High@L5.0)" or "(Baseline@L1.2)" etc. I had ignored this little detail before while I was converting, but then I noticed that all of my output files from Format Factory gave a video stream that read "(Simple@L1)" when looked at with MediaInfo.

As always, I began investigating this issue online, eventually locating an article on Wikipedia that referenced "Levels" and "Profile Formats" that matched the numbers I was reading in MediaInfo (L1, L2.1, L3.1, L5, etc.) It appears that these "Levels" limit the "maximum property values" of the video file, yet I've converted to video files at L1 with a resolution much higher than the Wikipedia article seems to suggest L1 is limited to.

So, help me out here guys! I am loosing some aspect of file quality when converting? What exactly are these video "Levels" and "Profile Formats"? What decides how they're set, and can I control this attribute when converting?

Thanks ahead of time!

[lordsmurf]

More isn't better.
The different combinations of settings are what create visual quality.

[HanDuet]

Sure, that's what I always thought. After all, the file size is only changes when I modify the bit rate, resolution, etc.
But if that's the case, what's the purpose of these "Levels" that makes them important enough for MediaInfo to actually detect and display them as a property of the video file?

Also, if the "Levels" are determined only by the other properties of the video, then why are all my output files from Format Factory labeled as "L1"?