Well.. i don't know if you have a PC or a Mac, but i have a mac and use a program called 'iSquint' you can download it free
here. Its a basic program, all you have to do is open the .avi file in it and press start (you can change the quality, too) and when its done you'll have have a .mp4 version of the file, and you can drag the file into iTunes and its ready to go on your iPod.
If you have a PC then there would be an equivelent to iSquint... i just don't know what it is.