Trust Fm

Try renaming the .srt and .avi files, so they match the DOS 8+3 filename format, and - maybe more important - make sure the filenames only consist of international letters (a-z). Hence don't use any characters specific for non-US countries or regions. In my case it seemed to solve the problem ...

I suggest you open the .avi in a player, then disable some of the filters eg. VobSub (choose 'Never Load'), and everything should come out ok.
I used to have the same problem: when VobSub was running, Avi2DVD couldn't perform a correct analysis of the .avi