A quick and easy way (presuming you have lame mp3 codec and xvid codecs installed already):
Open Virtual Dub and from the File menu "open video file" to load your original .avi file
Go to video drop menu and choose "full processing mode"
Go to video drop menu and choose "compression"
Choose X-Vid MPEG4 codec and then press configure button
Choose "Single Pass" at Encoding Type and leave target quantizer at 4.0
Go to audio drop menu and choose "full processing mode"
Go to audio drop menu and choose "compression"
Select "Lame MP3" on the left
Select "44100kHz 128kbps CBR Stereo 16kb/s" on the right
Click ok and then go back to the file drop menu
Choose "Save as AVI" and give it a new filename and voila it starts to recompress for you.
Taking an approx 1gig fraps source movie using the above method takes it down to just under 30Mb but ofc changing any of the settings like "target quantizer" or the audio bit rates will change the output file size with a direct trade off between size and quality.
There are ways to improve compression and quality like doing "2-pass" xvid encoding and using higher bit rates etc but for now whats above should give you a somewhat acceptable end video quick and easy
PS Virtual Dub, Lame MP3 and xVid codecs can be easily found with a google search and are all free to use programs.