If your using Toast 7, it usually deals with .avi's.
But in any case, if you use divx doctor to convert the file to .mov format it should work. You want it to be a stand-alone movie. Just drag the new .mov file into toast as you did with the .avi.
Your best bet at converting will probably be ffmpegx you can convert to lots of different formats with that, including .mov as suggested or you could try and re-encode it as another .avi which Toast may prefer over the original avi.
if that doesn't work or gets errors you could try another application called MpegStreamclip I recently had better luck with an avi movie I needed converting using this instead of ffmpegx which was giving errors.. most of the time though ffmpegx is more useful so try that first 🙂
Also have you tried making Quicktime save as movie? this would be a much quicker solution for making a .mov but does require the avi movie be recognized by quicktime player (which some aren't) and I think it may require QT Pro I'm not sure. worth a mention anyway i think.