ouch...so you're stuck with the mpeg container...
looking through some info, it looks like it can handle avi files (using a directshow filter), but can only export mpeg files (go figure).
Not sure if it's a Linear editor or non-linear, but either way, you shouldn't be editing with divx/xvid files (could have accounted with some of your .avi editing troubles)...not to mention that video quality would really take a hit upon export.
You'll probably want to export it (mpeg2) with as high of a bitrate as you can, uncompressed would be best, but I'm not sure if you have that option.
after you export, you should open it up in VirtualDubMod (VirtualDub can't handle mpeg2 streams ) from there you can either encode it with a lossless codec in the avi container (ie huffyuv or lagarith) then follow the guide...or just try to encode it with xvid in virtualdubmod (following the guide).
Reducing the resolution and cropping the video can help your final filesize
I'm not sure if encoding with a lossless codec before encoding with xvid would help the quality, but it would preserve the most quality when you transcode from mpeg to avi...but it would then be offset by the lossy encode to xvid. At any rate, it'l end up looking worse than when you export (lossy mpeg encode + lossy xvid (avi) encode = ugly)
Either way, you probably shouldn't expect the quality to be great...and if you edited with interlaced footage (llike vobs straight from an anime dvd) you're pretty much screwed (not easy to encode interlaced footage...and de-interlacing at this stage would throw your sync way off)