So at the moment you have uncompressed video in AVI format?
My suggestion: get VirtualDub, Xvid (which is an MPEG-4 codec) and the LAME ACM Codec. Load your original AVI into VirtualDub. Set video -> compression -> Xvid and set to a single pass, target quantizer of around 4 (?) (lower quantizer = better quality/larger size). Set audio -> compression > LAME abr around 192kbps.
Now save out a new AVI.