I've found the more likely culprit is that the "avi" is really something else, even something that QT
can play like mpg. If you wan't to do this the mac way and get it playing in QT, see here:
http://nasorscher.home.comcast.net/movieFAQ. Then just drop it on Toast and wait.
Alternatively, VLC can export the streams directly to mpeg 1, but you'll have to make sure you configure the export to be VCD compliant (File->Open File... instead of Quick Open File...). This is kind of an unsupported feature though, even more so than the fact that the whole mac port of VLC is in questionable status as far as development goes these days.