How do you make movies on HD take up less space

So Ive only got a 40 GB on this computer and my dvd burner is on my other computer at school. Ive been downloading movies and I hear they take up way to much space on your computer, so is there some way to keep the movies on here, but just make them smaller files ?
i want to know any way to free up space on my HD. I plan on getting an external HD cause at target you can get a 120 for only $99.00. but until then...can i get some help ?

 

If they are avi files, use a compression tool such as Divx - look up dr divx