Summary of solutions
.avi files are often (but not always) encoded with the divx codec.
VLC and Mplayer are the best players for these files, and both support subtitle files. If possible, use these.
If you don't have Toast, or you wish to convert to other formats, use ffmpegx. Watch out that you turn the soundtrack from ac3 into mp2 if appropriate. Unfortunately, ffmpegX can be a bit intimidating (use the Guides on the website), and can sometimes spend hours transcoding the video and then stop prematurely because it let you specify an illegal mp2 bitrate.
If you want an easier solution, install the free Quicktime components: AC3 codec (I think the one that works in 10.4.x is AC3 Codec.component 0.4b1), and the divx decoding codecs.
Now you can use Quicktime to play these, and Toast 7 can deal with them nicely (NB Toast actually comes with its own copy of the divx codecs).
Another interesting solution is to get a DVD player that can playback avi/divx files, but having looked into that I can reveal it is another whole can of worms (esp for subtitled films), and I'm now thinking a MacMini running VLC will be the best possible media server (at least if it ever gets optical audo out).