You can easily convert the video into the best format for the iPod using Quicktime, which installs along with iTunes. All you have to do is make sure that you have version 7.0.3 or above. Instructions: http://www.apple.com/quicktime/tutorials/creatingvideo.html .
If this doesn't give you the desired results, use FormatFactory, a free media file converter, and manually select the conversion settings (from the selection below). FormatFactory: http://www.formatoz.com/ .
SUPPORTED VIDEO FILE TYPES
* H.264 video, up to 1.5 Mbps, 640 x 480, 30 frames per sec., Low-Complexity version of the H.264 Baseline Profile audio up to 160 kbps, 48 Khz, stereo audio in .m4v, .mp4, and .mov file formats.
* H.264 video, up to 768 kbps, 320 x 240, 30 frames per sec., Baseline Profile up to Level 1.3 with AAC-LC audio up to 160 kbps, 48 Khz, stereo audio in .m4v, .mp4, and .mov file formats.
* MPEG-4 video, up to 2.5 Mbps, 640 x 480, 30 frames per sec., Simple Profile with AAC-LC audio up to 160 kbps, 48 Khz, stereo audio in .m4v, .mp4, and .mov file formats.