Have you tried vlc (http://www.videolan.org/
), it is in entropy under the 'media-video' categorie
To transcode you do the following:
1) Choose open file, there you browse to the file you want to transcode
2) In the same window, enable the 'Stream/Save' option and press the Settings button next to it.
3a) In the 'Stream Output' window under the 'Output group' select File and specify the file you want to be created. Use '.mp4' or '.avi' as extension depending on the 'Encapsulation Method' (see 4a and 4b)
3b) If you wanna see the video during the save enable 'Play locally'
4a) VideoLan cannot create 'avi' files, but maybe you're mp3 player also supports mp4 files, so select MP4 for 'Encapsulation Method'
4b) If MP4 doesn't work (try it first) you can force avi encapsulation by modifying the 'Target line'. There you need to change 'mux=mp4' into 'mux=avi'. I don't know if it still works, but I did it this way before.
5) Enable video codec and choose 'mp4v' (this is MPEG4, which is also DivX), change the bitrate according to what you need, Higher values give better result but larger files
6) For the audio, choose to your liking
7) Press ok in all windows open
Hope this helps you
EDIT: The following contains more info on converting video files for an IPod: http://wiki.videolan.org/IPod