In iTunes, after you’ve added your video to the library, right click it. Select Convert Selection for iPod. iTunes will let you know if your video is already in the correct format. If it’s not, your video will slowly be converted to an H.264 video. iTunes will keep your video proportional - and your new video’s dimensions will, in almost every instance, be 320 pixels wide by some number equal to or less than 240 pixels high.
Open your movie and, in the file menu, select Export… and in the export drop-down, select Movie to iPod (320 x 240) and click Save. QuickTime’s slow conversion process can take several hours. If you’re an inexperienced user, I recommend using QuickTime Pro or iTunes because they’re absolutely foolproof. However there are other free applications for converting your videos.