Yep, pretty easy to convert mpg to DivX avi. Get VirtualDUB from h**p://www186.pair.com/vdub/
Load mpg file in, in Video tab set to Full Pressing mode, then select Video Compression. Select the DivX 4 codec and set it Bitrate to 900. In Audio tab set to Full Prossing Mode, the select Compression and select MP3 at 128k 44.1 stereo.
Then go to File tab and select Save AVI, give a name, hit save, and wait for it to all happen. Done.
Yes the AVI will be quite a bit smaller than the original MPG files.