There are loads of free iPod conversion programs out there, the one I've used here is called 3GP Converter. All you need to do is select "AVC QVGA/192kbps" from the drop down "Model:" menu and simply drag and drop AVI files into the space above. The software will then start automatically converting the files and saves them to the desktop. A 30 minute episode will compress to about 40MB.
The next step is a bit more complicated and annoying, iTunes will allow you to add the new "M4V" file into iTunes, but will call it a Movie rather than anything else. You cannot change this to TV Show, nor add Season or Episode numbers through the info dialog. You need to use a program called AtomicParsley. This is a command line program which will change the meta data within an M4V file to whatever you choose. AtomicParsley accepts all the normal info exposed through iTunes such as Artist, Genre, etc. But it also exposes "TVShowName", "TVEpisodeNum" and "TVSeasonNum". There are a couple of other useful TV specific tags, but for me, these three are the most important.
For each of your converted M4V files, run:
AtomicParsley the.simpsons.1710.m4v --stik "TV Show" --TVShowName "The Simpsons" --TVEpisodeNum 10 --TVSeasonNum 17
Where the.simpsons.1710.m4v is the video to change meta data for, substitute "The Simpsons", 10 and 17 accordingly and you're done!
This creates a new video file which contains the new meta data - add this file to iTunes. Now if you view videos, select list mode and "TV Shows" in the search bar, you can see the Season and Episode data. When synced to the iPod, it has a "TV Shows" menu will lists all the Shows, then Seasons, then Episodes!! There is a description field in the meta data, so it would be possible to fill out a plot summary for each episode too!