^you need to transcode (uncompress the avi and then recompress to h.264) - that means cpu + hdd will be stressed. I would prefer to do it on an always on machine. I was hoping the raspberry pi hooked to an external hdd would be able to do it, but transcoding was not supported last I checked. If you have an old pc lying around, hook it up and use it exclusively for transcoding, It will take longer but your primary system will be safe.
<Disclaimer: All info was read off the interwebz when I had a similar idea>