After you select Tools -> Record -> Start AVI recording and then name the file, it should bring up a list of video compression choices. The only one that seems to work for me is
Xvid, so download that and install it.
After you install it, choose Xvid in the video compression menu and then record the movie. You can choose to compress the audio later; I usually use the standard MPEG Layer-3 encoder that comes with most Windows computers.
EDIT: for audio compression you need to use
VirtualDub, open the video file in VirtualDub, go to Video -> Compression and select the same Xvid codec (so it doesn't become uncompressed) then click Audio -> Full processing mode, then click Audio -> Compression and select MPEG Layer-3, with the bitrate being up to your choice. Then click File -> Save as AVI and name the video, and the audio will be compressed.