Trying to lay out all the steps and twists and turns to get a decent video from this somewhat crippled original video is like trying to write down steps for a doctor to operate. You have to start with a good basic set of skills in this area.

You want to stick with AVI just a differnt codec. I would get Virtual Dub and use a standard codec like Microsoft Video 1 or Cinepack but that is a hard question to answer because there are so many codecs and can't tell what is on your computer. That should get you a format that your editing software will like better. At 17fps it will never look that good and will be a compromise at best.