There are two versions of the e260, the v1 and v2. They handle video a little differently as they have different processors.
I routinely transfer video to the e280 using the Sansa Media Converter, as it builds the proper “container” for the video file which is in avi format. You have to use a final converter for the e200 series; transsferring directly will result in the error message.
If you have a v2, it’s easy to tell. When turned on, you’ll see a SanDisk logo with a reflection below it, then a blue sansa logo appears below that. The v1 device has a singe logo, the SanDisk logo with the “sunburst” to the right.
For the v2, there’s a handy trick. Since it’s actually a Sansa Fuze in an e200 shell, video4fuze can be used for the conversion, instead of the SMC. Video4fuze is available here on the forums (use the search box).
I have always had acceptable results with the Sansa Media Converter, in several versions. Getting it is free, but there’s a trick: you first have to download and install the Sansa Updater (look in the firmware thread, it’s listed in every one). Next, open the Updater and plug in your e260. This acts as a key to let the Updater know that you have a valid device, and then it will show as an available update.
Here’s what the Updater will show when the Sansa Media Converter is available:
Using the Sansa Media Converter is simple, you drag and drop your video or photos to the application’s window, plug in the Sansa, and then click on transfer. It will automatically fomat the video for use on the device.
If you have a v1, there’s another option for video, if you install Rockbox. I believe the format for video is different when using it; there are plenty of Rockbox + e260 fans here that can provide details.