There are lots of applications that can convert your music/videos. The problem you're describing is more of an issue with the application being used than of the iPod, itself. Whoever had SAMPLE stamped on their video probably downloaded some shareware package and didn't pay for it.
I've owned a number of iPods, currently having two 60GB black 5th generation iPods and a second generation iPod shuffle. One of the black iPods pretty much sits in my car all the time using a Harman Kardon Drive+Play to connect it to my car's stereo. The other travels around with me wherever I go. I even got myself a nice high-end set of in-ear earbuds that sound really good and are even great on airplanes since they shut off just about all outside noise.
As for the iPods, themselves, it's all a matter of opinion whether they're the greatest thing since slice bread or just another MP3 player. They have a nice interface but so do a number of other portables.
If you like accessories, the iPod is for you. It's got well over 3,000 accessories ranging from zillions of iPod cases to FM tuners to just about anything you can think of. More and more cars these days also support iPod hookups. In comparison, the cupboard is practically bare for every other music player out there. But that's what you get for a player that holds 70% of the market.
There's also the matter of iTunes and the iTunes Store (iTS). Selection there is second to none, but if you're one of those who gets 99.9% of your music by ripping your own tracks from your CD's, then who cares? iTunes is a nice application by itself even without the store, so I recommend you play around with it to see if you like it even before you buy a music player. Try out Cover Flow. It's rather cool. Cover Flow is a way iTunes presents flipping album covers.
iTunes can also rip tracks from your CD's for you in a number of formats. It supports Dolby's AAC format primarily (the native format of the iTunes Store) but can also rip in MP3, WAV format, AIFF (Apple's non-compressed format), and Apple's Lossless compression format. There is no support for WMA, Microsoft's music/sound format nor WMV, Microsoft's video format. Sensing a pattern?
Video-wise, the 5G iPod supports MPEG-4 and a superior variation of MPEG-4 called H.264, a very high-quality codec that's used quite often in high-definition Blu-Ray and HD DVD movies. Video resolution from the iTS is essentially 640x480 while videos you make yourself have similar limits based on bitrate and a bunch of other techy stuff that I won't go into here.
On the Macintosh, two of the best free programs used to make iPod videos are Handbrake and iSquint. iSquint's big brother, Visual Hub (~$23), is excellent as well, plus it can make PSP, Flash, AppleTV, AVI, WMV, DVD (create VIDEO_TS) and other types of videos. I'm not as sure about the Windows side since I primarily use Macs for music and video. My Windows machines have been sitting around powered off lately. I do know there's also a version of Handbrake for Windows.
iTS is also home of many movies and TV shows you can buy. I've gotten a number of TV shows, though no movies, and they're fairly decent, just shy of DVD quality (720x480 for DVD versus 640x480 for iTS). Since you'd be playing them on a small 320x240 screen, they don't need to be super high-caliber. The video screen is very nice. Some other players have larger screens, but not necessarily higher resolution (e.g. Zune).
All in all, I'm quite happy with my iPods. I know there will always be a lot of accessories for it, plus I know that my investment in a music/video library will be good for a long while since Apple isn't going anywhere and years later I can upgrade to a newer iPod (still waiting for that true video iPod like the iPhone except with more storage and no phone) and still be able to play my stuff. Plays For Sure, anyone?
If you don't know that reference, Microsoft was trying to compete with Apple by introducing their Plays For Sure music format, complete with proprietary copy protection and the Urge store, accessible from Windows Media Player. Lots of music players supported it, only to see Microsoft abandon it a year or so later in favor of another system for the Zune. So lots of people ended up getting the shaft on that one.
If you have any specific questions, feel free to ask.