The avi's should be compressed with a video and audio codec. Divx or Xvid for video are good, and mp3 or ac3 is good for audio. Chances are you're not compressing one or the other. You have to change the settings on the codec configuration. The filesize largely depends on bitrate. The quality of the output avi will be a combination of bitrate and original source quality.
I use virtual dub with divx and mp3 codecs which there is a thread already started if you want more info:
http://wideworldofwomen.net/WWW/viewtopic.php?t=71927
You'll have to do a few tests with a small 5 second clip to see what turns out right. You can also find a lot of good info by searching whatever codecs you plan on using.