Try installing avidemux (
http://fixounet.free.fr/avidemux/). It is a graphical way to edit avi files. I've only used it for splitting big avi files, but you should be able to save as a new avi file with different audio and video codec. I'm not sure if it will do deinterlacing.
Another option would be mencoder. I've only used it for converting vob files to avi, but you should be able to transcode the avi file. Here is the command I use for vob files:
mencoder movie.vob -ovc lavc -lavcopts
vcodec=mpeg4:vbitrate=1000:vhq:vpass=1 -vop
scale=640:480,lavcdeint -oac mp3lame -lameopts
abr:br=128 -o movie.avi
followed by:
mencoder movie.vob -ovc lavc -lavcopts
vcodec=mpeg4:vbitrate=1000:vhq:vpass=2 -vop
scale=640:480,lavcdeint -oac mp3lame -lameopts
abr:br=128 -o movie.avi
That generates a avi file with a video bit rate of 1000, vhq="very high quality", -vop options are to scale the video to 640x480 (full screen) and lavcdeint deinterlaces the source video. The lavc codec is as good as xvid, but you can use xvid if you want. The audio is encoded to mp3 using lame with an average bit rate of 128. You may be able to modify that to use an avi file as the input with a different avi file as the output. Look at the mplayer documentation in "man mencoder".