Divx Digest has a tutorial for converting .AVI movie files to iPod-compatible video using free Windows software 3gp Converter.
The Divx Digest's step-by-step tutorial walks you through the process, from initial setup to the simple drag and drop interface of 3gp Converter. After your file has been converted, 3gp Converter automatically opens iTunes and adds the new video to your iTunes library, at which point you can easily transfer the video to your hot new holiday iPod.
Convert .avi to iPod video using 3GP Converter [Divx Digest]