I do it like this:
On my linux (192.168.1.1):
Open file (advanced)
Select the avi, then in advanced options-> parameters
Click http, put the adress 192.168.1.1 Port 8080 (*)
Transcoding options: choose your codecs
Click ok
click ok
Then on my client:
mplayer
http://192.168.1.1:8080
(*) If you want to put port 80 which is a priviledge port and not openable by a user, then you need to launch vlc as root!
I use this method for streaming to my pda.