"What am I doing wrong?"
Listening to FCP7? Come on, that's the same lot that told you to export via Compressor...
You should be able to transcode from your source AVIs using Compressor (and your custom settings) without involving FCP at all. Then you should be able to bring the footage in using the Import command. (If your project requires logging there'll be some manual work.)
Media Manager has done many good things for me and several evil things as well. I avoid it.