Then something important is missing in your image. A lot of things can go wrong so without posting full output of your shell session it is hard to even guess.

I think that slightly easier can be to install bootmenu into initfs and use its usb networking mode to mount cleanly flashed rootfs directly on the 770 and try to modify it (possibly repeatedly) until it works. With one line bootmenu modification you can even let the device continue booting while having usb networking shell still open.

Bootmenu installation can be done on PC in similar way like with rootfs. Once one has original initfs extracted it should be possible to follow initfs_flash script from http://fanoush.wz.cz/maemo/initfs_flasher.tgz and do things by hand (copying bootmenu.sh, extracting dropbear,... tar archives) and create new image via mkfs.jffs2

And BTW both for rootfs and for initfs images it should be relatively OK to distribute binary diffs/deltas http://code.google.com/p/xdelta/