The issue at hand:
Although I can play the resulting encoded .avi file by any media player, I'd like to know WHAT am I doing wrong?
Here's what my options look like before encoding starts:
You definitely must set Interleave options. (At greenshot_2010-04-11_0lzpo.png.) I dont know optimal interleave for you case, Search and experiment from every frame to some seconds. Prefer multiply the number of frames. every frame = 1/29.97fps = 0.033s every two frames = 0.067s ...
Lover values of interleaving is better for "sequential read" but lower values of interleaving gives larger file size.
I think, ideally, the size of the chunk must be equal the size of read block or size of readahead buffer.