The conversion is fairly slow (about the same rate as Quicktime Pro) but is really quite handy. Simply open up the Videos section in iTunes, right click on the video you want to convert in your video playlist, and choose "Convert Selection for iPod". If the video is already compatible with your iPod, iTunes will tell you that it doesn't need to be converted.
Now if only I could do direct DVD to iPod inside iTunes. A girl can dream right?