I never ever associated the word "lossless" with XVid. 
TechSmith has their own video codec that actually does record in lossless while conserving storage space, so you don't have to choose the Uncompressed codec that's default in most codec listings. It's called "TechSmith Screen Capture Codec" and it comes bundled with Camtasia Studio (and its own sub-tools).
Ah, I know there is a "lossless" setting for one of the "mp4" encoders. I can't read goodly. I prefer MSU Screen Capture or UTVideo for my lossless, but I'll try out the Techsmith thing.
All things considered, this sounds like how RemoteJoyLite works for the Sony PSP. All it did was display exactly (for the most part) what was on your PSP screen. It's pretty lightweight itself, even when recording with FRAPS. So lightweight, it could be run on older hardware, in fact. It also has the added bonus of letting you control your PSP via PC game controller or keyboard, which is super nice for getting the real "full screen PSP" experience.
Yeah, Except this seems to have it's own dedicated video processor, while RJL uses software and that causes it to skip frames a bunch because it's using "Megahurtz" from the PSP to achieve its goal. If someone made something like this for PSP or Vita I would be interested, because having a dedicated hardware handling the video processing is nice.
On a similar note, I wonder if you can use this device to control the 3DS with a controller or keyboard/mouse. But I imagine not since this is just soldered to the Video out and has no access to the 3DS's "input" functions that RJL has because it works via software. Playing PSP games with a Dual Shock 2/3 is really comfortable.
I know the PS Eye does 640x480@75Hz(Or 320x240@125Hz) and it pretty much fully saturates the USB 2.0 bus. I wonder if when the 800x240 support is added someone could write a version of the program to be compatible with 3D monitors or TVs.
200 Is a bit much for me right now, but This seems like something really nice.