My AVI files look great on my computer....(320x240 - 25 frames - 24bit)
but when I convert them to MPEG 1 or 2, the picture looks milky and
washed out.....Does anyone have any ideas???

Soubds like the bitrate you're specifying for the MPEG output is too low. What program are you running, and why are you outputting them as MPEG? For web? DVD?

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I'm using MegaPEG LE on Adobe Premiere...
My AVI's pixel depth is 24 bits, no compression, Audio 16 bit.
MegaPEG automatically sets at Video 4000 bits and Audio 256 bits.
If I set it manually to Video 24bit, then the picture looks much worse.

PS - Its for burning DVD's...I use NeroExpress6, which automatically
converts AVI's to MPEG's, but it still comes out looking milky.

I found a great program: TMPGEnc. Converts almost anything into DVD format (mpeg-2) or SVCD. Very bare bones, non-commercial software with no frills. Quality is always excellent. Free trial and many other programs at pegasys-inc.

http://www.tmpgenc.net

or

http://www.pegasys-inc.com