That file size is about right. I would imagine that your previous efforts were uncompressed AVI. Using lagarith allows you to create a lossless file that is considerably smaller than an uncompressed one.

VLC always gives that message. You don't play massive lossless AVIs in VLC. If you need to preview, do so in Virtualdub.

If your transfer takes nominal analogue blanking into account, you might expect to see thin pillarboxing of up to eight pixels in width, on the left and the right. If that's all you see, then it's normal and you have done nothing wrong.

Incidentally, if your picture looks slightly squished, it is because you are viewing a 720x480 image without the 16:9 DAR that stretches an anamorphic encoded image back to the right size upon playback. Don't worry about this. You add the 16:9 DAR on re-encoding.