Yeah, Gordian Knot does the job well for .avi files. Personally I recommend using .mkv though: even if you limit yourself to the format restrictions of .avi -- mp3, ac3 and a other, inferior audio codecs for starters -- you can encode higher quality video in just as much space.
'fore you get scared away, .mkv isn't a codec, it's just a file wrapper. You take your video stream -- XviD in most cases -- and your audio stream -- mp3, ogg, rm, etc. -- and stick 'em together in one file. It's a great format, with support for embedded subtitles, a large variety of audio and video formats, and chapters, among other things. .mkv files have almost no overhead, even when using relatively complex audio formats like Ogg Vorbis; on a 2 hour, 700mb encode you'll probably get an extra 10~16 megs of space for video than you would with .avi.
Gordian Knot has support for .mkv, but the muxing is inefficient. If you get mkvtools from matroska.org and use them to mux your final filesize will come out about 0.5% smaller than Gordian Knot calculated. (so a "700mb" encode will mux to ~667mb)
This is, of course, a little more work than just loading the files and letting Gordian Knot do everything for you, but you'll get a better file in the end.