It looks like I am receiving the proper commands from the Dragon's Lair board!
Unfortunately, my own AVR code seems to be pretty buggy because it is not responding properly to those codes. This is a little surprising because I am using the exact same code on the AVR to interpret and handle the laserdisc state as I am in windows/linux for DAPHNE. I did this on purpose to ensure that the AVR code would be good. Well, apparently it's not so good. But the problem is probably only in one or two places. For all I know, it's a buffer overrun or some nonsense like that.
Basically, what I am seeing right now is Dragon's Lair is sending the proper search/play codes and the AVR is responding with endless "busy searching" codes. Bad AVR! :)
At least the problem is back in my software which is my specialty, so it shouldn't be too hard to fix.