Apple Computer Inc. had this to say about video conversion within iTunes;

Verifying video conversion in iTunes
iTunes 6.0.2 or later includes the capability to convert some movies into a format that can be played on an iPod that supports video playback (currently the Fifth Generation iPod). To verify that videos converted using this feature play correctly on iPod follow the steps below:

1. Download this QuickTime sample movie: sample_iTunes.mov (right-click or Control-click the link and save it to your desktop). If using Explorer choose Save Target As from the shortcut menu. If using Safari choose Download Linked File from the shortcut menu).

Note: If the movie starts to play in a browser window, go back and try again (make sure you hold the Control key down while clicking if you don’t have a right button on your mouse).

2. Open iTunes and add the sample movie “sample_iTunes.mov” to your Library. Note: The file
may also appear as simply “sample_iTunes”. To add the movie, open iTunes and choose Add File to Library from the File menu.

3. Locate and select the “sample_iTunes” file in your iTunes Library.

4. From the Advanced menu, choose Convert Selection for iPod. While converting, you will notice an item named “Converting Songs…” appear in the iTunes Source list. The “Converting Songs…” item disappears after the conversion is over.

5. When the conversion is complete, iTunes will create a copy of your movie in your library. There will be two movies listed with the same name. The sample_iTunes file with a kind of “MPEG-4 video file” is compatible with iPod.

6. Connect your iPod and sync the converted sample movie to it using the procedure detailed here.

7. Eject your iPod from iTunes and disconnect the iPod from the computer.

8. On iPod, find the sample_iTunes video. It is available in the Videos menu in the Movies menu. Verify that the “sample_iTunes” movie plays on your iPod.

http://docs.info.apple.com/article.html?artnum=302892