check Doom9 and download gordian knot, it is quite good at re-encoding movies from dvd, and has the option for avi files, even though i havent tried it yet. You can also view the guide there.
But recompressing that movie from 1.3GB to 700MB will result in a huge quality loss, presuming that its a full length movie.
You could skip the whole gordian knot thing if you dont want to rip dvds, and just use virtual dub, you'll have to do some math for bitrates etc, but it will still work.
You can also use virtual dub for simply splitting the file into two parts that will fit on 2 cds. This would be a better option as you wont loose quality re-encoding it. Look under the guides section for splitting avis using virtual dub.