No I think it is the way that VLC manages the codecs and filters. WMP is just not very good at it. The only format where I get poor video from VLC is WMV--everything else looks just as good as when played with WMP. Don't know what you're seeing there. Maybe the video bitrate of the older ones is low, or the encoded screen size was small. I make my AVIs with the slider set for 1500-2000 kbps, or high enough to get to .6 or .7 in the Bits/Pixel column on DVDFab's Configure screen.
/EDIT/ I just looked at your screen capture from AVICodec. The video bitrate is low for the screen size you selected. Run that slider up. The files will be bigger but they will look better.
/EDIT/ VLC does have controls for audio effects. WMP is designed so that your grandmother can use it, which means little real control or flexibility.