I am confused... is that a Windows Media WMV file, or a DV AVI file?
Reported as Windows Media Video 9 (WMV3).
You are starting with a heavily-compressed file, the WMV, so original data has been lost.
When you output your Timeline, you will again need to apply heavy-compression, to keep the file size down, and also experiment with the Bit-Rate.
The only aspects, that will address file size, is Duration (pretty much already set), and Bit-Rate. The lower the Bit-Rate, the smaller the file, BUT at the expense of Quality. As you have already taken a hit on Quality, with the initial WMV compression, and you will loose even more Quality, when your re-compress, you need to study the output files, to make sure that they are still satisfactory for delivery.
If you can do the editing required in Windows Movie Maker, it might be a better program to use, as it is built around the WMV specs. Not sure if it has the Effects and control that you need, however.