I've used a few apps to convert AVI to mpeg and they've all played fine on my PC (thought not all encode 5.1), mounted or playing on plastic. Yet I have some problems spinning the disks in my standalone. I get choppy video that pauses lots. Not solved this issue yet, so all the HD Xvid avi stuff I get has to be played on my PC.
A standalone Divx player or XBMC will solve this of course.