You actually have to download a converter. But they're all crappy unless you buy one, which is expensive. In my opinion, it's a very smart move from Apple. Forces people to buy movies if they want them on their iPod. I'll let you know if my conversion works! :)

Do a right click on the video and there should be a "create an iPod or iPhone version" and it should start converting it. I can't grantee it but that's worked for me so far.

iPod plays videos of certain format only.. U just need a real nice converter.. I use iTransPod which is very easy to use.. its an iTunes plugin.. its as easy as adding a file to iTunes..Click on it select a file. it will convert and add it to iTunes.. you jus have say which file u want..

http://www.rarefind.com/iTransPod .. check it out..

See how it works on youtube
http://www.youtube.com/watch?v=_fCxafTNhCw