I just use Instant Handbrake to rip them directly into MP4 format and the files play back just fine on my 5g iPod, N800, N95, and PSP.
I did this with the entire second season of "Wild Wild West" and it worked flawlessly.
That's more of a "one-step" solution though, and while you can tweak a few things in Instant Handbrake, you can't tweak much.
I thought Handbrake could just rip into regular MP4 (non-H.264) so the AVI step is not needed?