Looking at a ebay add looks like 2 options are H.264 and AVC.  I would think H.264 format would give a smaller size then AVC which is designed for blu-ray.
 
If anyone wants one
http://www.ebay.com/itm/Brand-NEW-Hauppauge-HD-PVR-1212-Personal-Video-Recorder-/260843307779?pt=LH_DefaultDomain_0&hash=item3cbb790303

1st I've heard of one of these boxes.  I would think there would be a output resolution setting somewhere or even a compression setting.  If not you can always bring it into a video editing program and shrink the size to what ever you want.  But yea 243mb's for a 3 minute video is too big.

I'll add you when I get home cribbel1.  Thanks for the advice Dean. I do have Move maker so I will try those settings you have and test it out more this weekend.

i record at 720p 5.1 with 8mb bitrate and unless i record for a really long time files don't get huge and if the do just use windows live movie maker or some video editing software to compress them down a bit.

1080 i  is the right setting, witch makes it hard to play FPS games.. I got one to :D   
 
But i record in 720p.. Just because it takes to long to edit in a video program. Add me on youtube and i will add you :D Bless!
 
  

Thanks for the feedback all.  I'll mess around with the settings tonight and this weekend.  Hopefully I will be able to start streaming live gameplay online.

Record at a lower bit rate like 3-4MBPS.

it's recording it in mp4 format. my xbox was set to 1080p not sure what the pvr was set on.

It's probably recording to an AVI file, which is supposed to be massive in size and massive in quality. MASSIVE. 
 
What you need to do is compress and encode that fucker into something like an mp4 file and you'll see it's filesize cut quite dramatically. The raw AVI footage should really be kept on it's own hard drive as a backup.

The only thing I can think of is if your XBOX is set to output 1080, then switch it to 720 and maybe that might reduce the filesize. I have one of these HD PVR boxes but I haven't messed around with the settings too much.

So I finally got my FiOS internet installed and figured now was good time to purchase a Hauppauge PVR to record some of my gaming for YouTube and streaming to websites like justin.tv 
 
Took a little time to figure out the right settings for my Xbox but the quality of the video is amazing.  Below is the picture of the box and a video of my brother and I playing Super Puzzle Fighter over XBL, I'm on the left. Only 3 mins but file size was 243MB.  If anyone knows any good settings for a smaller file size without compromising the video quality too much I would greater appreciate it. 
 
P.S. Today was my first day back on my Xbox in 6 months due to a E74 error hence the crappy gameplay.