SOLUTION!!!!!!!!!!!!
you need to remove the backgroun from the ipod source in order for you video to play, i just hit the reset button on mine and then went to AV menu+initial menu+aux1-IPOD+aux2-off then go to ipod av menu and select video. this sould work fine. i was having trouble with it too but finally figured it out!!!!!!!! hope everyone can get it to work as well.
thanks