Make sure your LCD monitor is at its "native" resolution. One of the drawbacks of flatpanels are they look like crap at any resolution lower than their highest possible resolution.
Most 15" LCDs are designed for 800x600 or 1024x768
Most 17" LCDs are 1024x768 or 1280x1024
Most 19" LCDs are 1280x1024 or 1600x1200
TVs show low quality VCDs very well. Movies that look like crap on your computer will most likely look fairly good on your TV. If you have a HiFi or very large telvision, this may not be the case though.
As far as converting AVI to MPEG, the quality ends up being very poor... Noticeably moreso than the original source video. Unfortunatley, there's no much you can do about this. You can play with filters and whatnot, but what it comes down to is VCD quality is poor to start with (For 2-CD VCD sets) and then your source is not perfect quality (Your DivX movies may already contain some 30-50% quality loss already).
Making VCDs from DVDs usually turn out decently, but DivX itself is already a lossy format. Converting the AVI to MPEG format amplifies this.
