I pleasantly appreciate the fact VideoReDo works VERY well with MPEG video files, but I'm wondering if it can work with original files saved as .AVI format, or would I have to convert the AVI to MPEG (which causes wasteful redunancy and possible degregation / quality loss)?
No. AVI files can not hold MPEG2 video, and currently we only support editing MPEG2 videos. When we eventually upgrade to allowing MPEG4 editing then AVI files will probably supported provided they contain MPEG4 video. (AVI is a generic container and can hold a lot of different audio/video formats)
PhilViger, a .avi file is most probably already a compressed file. So whichever way you will process it, will be affected by the destructive process that originally created it.
To genback to an MPG2 have you tried freeware Internet Video Converter? Go to download.com and make a search for "IVC".
The resulting .mpg is accepted by VRD. So here you have your answer, you can input a .avi into VRD. But do not expect miracles, the .avi destructive process takes its toll, and well.
You may try to first boost-up your .avi in VirtualDub by using the Resize and Sharpen filters. But whenever you do not have anymore your highest-generation original file, anything you try will be just compromise.
Virtualdub can cut anywhere, but cutting on non-keyframes requires re-encoding. The later editions of virtualdub have a 'smart re-encode' which only recodes the frames needed when cutting on a non-keyframe in a similar manner to how videoredo does.