When you say you can't get "good quality", what are you expecting? .avi files are already compressed from the original video, and may not be in good shape to begin with (for a full length movie if you are under 1.5 gig in DIVX, it's not "good" quality). Then you are converting them again to fit in a smaller screen.
If you want good quality, start with an original uncompressed source and convert to iPod.