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I've done some quick testing and can assure that the old 5G iPod with the updated firmware supports videos with larger resolutions than the older limits! I haven't tested extensively yet, but I managed to get an h.264 at 640x480@15FPS, captured from the iSight and exported with the new "Export for iPod" option.
I am now testing with Handbrake to see if full 640x480@30FPS h.264 is supported.