.mp4 H.264.
AFAIK, iTunes will play it but won't convert your conventional file (.AVI) to that - you're better off finding a simple converter (if you're on OS X, try iSquint or Visual Hub - Windows user, hope someone else can advise on it) If all else fails, Quicktime can convert certain formats to H.264.
The iPod can play .mp4 as well mind.
And the FM transmitter works by attaching the transmitter to the iPod and select an empty frequency e.g. 100.0 and tune your car radio to that and you essentially have a radio receiving radio frequency from the transmitter within the vicinity![]()