Avi is just a container…the codec used in it determines how compressed it is. There is such a thing as uncompressed avi…and they can be enormous size for an hour’s long video.
The mpeg2 found in dvd’s is highly compressed compared to the original source…the film it is shot on. So it isn’t exactly a pristine source either.
But the general idea behind peck1234’s reply is correct. You cannot make a high resolution, high bitrate video that looks better than the source, just because you are increasing resolution. Everything depends upon the source.
There are some guides for HD DVD authoring: http://www.avsforum.com/avs-vb/showthread.php?t=705146
But if you are starting with a standard definition avi, you are better off converting to a regular dvd.
If you are trying to use the Xillisoft HD Video Converter, I can’t help. And I’ve not heard much good about their software.