In this day and age of terrabyte hard drives, 35 GB isn't so big anymore. Lagarith makes slightly smaller files. DV will be quite a bit smaller yet, but it isn't lossless. I might suggest installing Cedocida if you want to try making an DV intermediate AVI. It'll have to be 720x480/576 and 29.97/25fps. It uses just under 13 GB per hour of video. Me, I would never use XviD for an intermediate AVI. Maybe others would. I
do use Lagarith all the time.
http://www.videohelp.com/tools/Cedocida_DV_Codec
Yep, it looks like you can have only 2 audio tracks when using GKnot. You could add another one afterwards easily enough, I think.