If MAGIX video deLuxe only allows you to encode to MPEG, my suggestion is encode to the highest quality MPEG possible and use another program to reencode it to a smaller AVI, like VirtualDub. If it allows you to encode to AVI as well, use the XviD codec or similar, like explained in the guide. If you need help using VirtualDub drop me a PM or post here too. Also make sure all interlacing options are *OFF* in your magic (I've never used it but it sounds like a program for encoding to DVD/VCD.)
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