Okay, it sounds like you're using a similar dialog system to mine.
There are definitely options available to you for video compression with Adventure Maker, but they won't be free. Popular AVI video codecs like Divx would work, but they do have licensing fees. Depending on the budget of your project, this may or may not be an issue.
Currently, there is no quality AVI codec that is free for commercial use and still in development. There are a few abandonware codecs that may work, but their compatibility with modern operating systems and legal status may be sketchy.
With Adventure Maker, you can play Flash files. This would, theoretically, enable you to use Flash-encoded video files (.flv format) with your game, which is free to distribute. This will, however, enable the user to right-click onscreen and access the Flash menu. There is no legal way to bypass this. Also, some people believe that Flash is on its way out. I am not among them, but it should be mentioned anyway.
Lastly, Adventure Maker has a giant flaw on Windows 7: videos are not seamless. When a video is played within a frame, a black box pops up for a split second where the video is going to play before it starts. It looks quite jarring, and Adventure Maker hasn't been updated to fix this bug. Since you mentioned Wintermute's videos as not being seamless, I figured I should mention this.
If Theora video is a must for you, then Multimedia Fusion 2, which I mentioned above, would work well. It does support Theora, though it currently requires the codec to be installed on the user's system. It's not a huge issue though, since you can include an installer with your game.
A potential downside for Fusion, however, is that you would have to create your own save system, inventory system, etc. None of these are particularly hard, even for non-programmers--I can attest to that from firsthand experience.
Overall, given your description, I do believe that Multimedia Fusion 2 would be your best option. It works with Theora video, it is actively updated, and it is capable of doing everything you describe. In addition, it is easy to use, features active development and a helpful community, and is capable of producing games on practically every platform imaginable.
Multimedia Fusion 2 Link:
http://www.clickteam.com/website/usa/multimedia-fusion-2.html