it's a CRApple product, so instead of making their device compatible with normal video codecs (like divx), they try to push their proprietary shit on you. from the apple website:
"H.264 video, up to 1.5 Mbps, 640 by 480 pixels, 30 frames per second, Low-Complexity version of the H.264 Baseline Profile with AAC-LC audio up to 160 Kbps, 48kHz, stereo audio in .m4v, .mp4, and .mov file formats; H.264 video, up to 2.5 Mbps, 640 by 480 pixels, 30 frames per second, Baseline Profile up to Level 3.0 with AAC-LC audio up to 160 Kbps, 48kHz, stereo audio in .m4v, .mp4, and .mov file formats; MPEG-4 video, up to 2.5 Mbps, 640 by 480 pixels, 30 frames per second, Simple Profile with AAC-LC audio up to 160 Kbps, 48kHz, stereo audio in .m4v, .mp4, and .mov file formats"
thus, you need a program that can encode your existing videos into one that they support (mpeg4/h264). here's a link to some free ones (SUPER and handbrake), but googling around will find you some more:
http://gulwestfale.net/freeprograms/videotools.htm
i recommend you use SUPER, as it has ipod profiles already built-in and is rather easy to use.