it won't (as we all know) transfer using itunes. here's the hack/workaround. encode your video to spec (750kbps max H264, etc) and use itunes to transfer it. make note of the file size. open your ipod_control folder on the ipod drive and search for all .mp4 files that are approximately the same size as the file you transfered - this should make it relatively easy to find the final resting spot of the "properly" encoded video file. note the filename, and rename your higher bitrate (i'm up to 1400kbps h264 without any skipping thus far) to the same name. copy it in place of the original "proper" video file, unplug the ipod, and give it a try.
seems like the decompressor chip is capable of a lot more than Apple wants us limited to.