The problem is the fixed resolution of the 16" Apple Color Display and the number of colors available is only 256 on the 65/6400 series CPUs that only have 2 or 1 MB of VRAM on the logic board, respectively. This results in the error message "Invalid JPEG data. Your movie clip may be corrupted.". It can happen on any monitor/CPU combination when the number of colors is 256 or less in 640 x 480 resolution. For Avid Cinema to open and function correctly, you need to have a monitor/CPU configuration that supports 16 bit color depth in at least 640 x 480 resolution.
On the 6400/6500 the only way to resolve this issue is to use a monitor that will be able to display the 640 x 480 resolution in 16 bit color (14" display, 15" Multiscan display, etc.) and to refrain from using the 16" Apple Color Display.