I'll explain what went wrong here.
What happened is that the AVI file was broken. Yes, broken.
Windows, in its infinite wisdom, tries to render every file that you click on for that stupid little preview window on the left. But its renderer pretty much sucks. Therefore, if there's ANYTHING wrong with the AVI file, or even if it just uses a really complex codec or is very long, the file will register as "in use" even though it isn't.
Just clicking on it to select it and then delete it ... puts it "in use".
The quickest way to delete a file like this is to reboot and then use the command prompt to delete it. Or, to use an eraser program, or to unhook the handle to the file with something like Process Explorer.
There are also patches floating around (registry files) that will disable the automatic preview for AVI files. People that use Kazaa and whatnot to download videos run into this problem ALL THE TIME.