650MB for a 2 hour movie? VBR for audio? And you're complaining? Try 1 CD per hour (2x700MB) or >1500kb bitrate, > 640x480 resolution (although I prefer 720x352), 128MB MP3 CBR, 2-Pass encoding w/ DivX 5.05 in VDub and you'll see what DivX should look like.
And if that doesn't do the trick, get a DVD writer and DVDShrink it.
BTW, you never said what OS you're running. VDub runs flawless under WinXP Pro.