QuickTime Pro. $39.95 upgrade from Apple. You can export to MPEG for DVD. Or, I've never used it because I use DVD Studio Pro, you might be able to import AVI into iDVD (probably not until you upgrade to QuickTime Pro) and have iDVD convert them. Also look into Roxio Easy DVD Creator.
Download and install the DivX QuickTime codec. This will enable iMovie and iDVD to handle your .avi video and audio. Hopefully, you don't have some little-known audio format. With a compatible QT codec, however, you are golden. And QT Pro can't do squat without the proper codecs.