Timecode mystery: Watcher/Response via Compressor

If I send a reference movie to a Watched folder, where the Response is to apply a Compressor setting, (resizing, flipping to h.264/mp4, and adding timecode burnin), the new video file does not maintain it's 1hr timecode from the FCP timeline, and is drop frame.

The result is when we try to use the "go to" buttons during annotation, they do not work. Also, every time an annotation is added, the playhead automatically jumps to the beginning.

Is the Compressor setting I have associated with that Response whack? How do I make a setting that maintains timecode and non-drop of the FCP timeline?

We're shooting 23.98 and using Apple Res422 (LT)

MacPro OSX 10.6.6 2x2.26 QCIX 10GB 1066MHz DDR3 FCP7.0.3/FCS3
FCSvr1.5 Xsan2.2 DotHill 24TB QlogicSANbox 8GB ATTO 8GB