Never answer "yes" to the VBR stream warning. That is present due to a limitation in the AVI format, which doesn't handle VBR streams well. (at least mp3 streams) New versions of the DivX/XviD codecs have no problem playing the stream properly.
If the sound in the file is mp3 you may have to extract it anyway, VBR warnings or no. (If you use TMPGEnc, you will have to do this) Once you open the file -- and answer "No" to the VBR warning -- go to Streams->Stream List. There should be one stream in the list, which will be your audio stream. (should have MPEG-1 layer III in the text, or something similar) Select that file, then hit the "Save WAV" button. Pick some name you'll remember for the filename.
Once that's done, do a fast recompress of the movie as I described, then fire up DIKO or TMPGEnc and proceed with the conversion. If you're using TMPGEnc, make sure you select the wav file you created as your audio source.