So you want to convert a DVD title into a XviD/MP3 *.avi file?
FYI there are other tools out there which might be easier/produce better outputs than VLC.
However, you can do it by streaming a selected title to a file. Open VLC and go to:
Media >> Convert / Save...
Click on the "Disc" tab, then check "No disc menus". This will then use the dvdsimple:// module (as supposed to navigating menus etc.).
If the DVD has multiple titles etc. you will probably want to select the specific title you want to convert. Title "1" will normally be the main feature. Click "Convert / Save" to go to the next section.
Enter a destination file name (e.g. "C:\out.avi"). Then you'll want to make a new profile if you want the an XviD/MP3 AVI. To do this click the "Create a new profile" button (the far right button next to the profile drop-down) and give it a name.
For the "Encapsulation" select "AVI". For the "Video codec" check "Video" then select "DIVX 3" for the encoding. You might want to scale the video so at the bottom select a scaling size (e.g. 0.75 should work well). For "Audio" check "Audio" then select "MP3" and change the sampling rate to "48000". Then press "Save".
Select the new profile you've create as the Profile, and press "Start".
That should be it in theory. To check it's work properly wait for it to start encoding, let it encode the first minute or so, then stop it and check the output. If you're happy with it repeat the process and let it finish.
If you'd like a see a command-line based HowTo see here:
http://wiki.videolan.org/Rip_DVD
Arite.