I use VCDGear to extract the MPEG2 file (though sometimes can just copy it off the disk), then transcode with TMPGEnc 2.5 -- you can also use any video program you may have, like VegasVideo, Adobe Premier, etc.
Extract the MPG file out of the cue bn file (EXTRACT, is not COPY) Use Isobuster right click on the mpg and select "Extract but filter M2F2 mpeg frames" Then you will have a proper mpg file.
Load the MPG file into Vidomi (see the DVD to DivX tutorial) and encode to DivX.
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