Yea, you definitely need more RAM; regardless of the DIVX issue. That's just too low for OS X. As far as processing power...that could use an upgrade too, but the memory option should make the biggest difference for the least amount of money. OS X on a 1GHz G3 would still be crippled by that low amount of memory.
When I first got my iBook (G3 900) I was a bit ticked off. It came with a total of 256MB (128MB built-in, 128MB stick) and was barely faster (responsiveness wise) than the G3 300 desktop I have. Faster, but not enough to justify the $900 or whatever I spent, at least not to me. Removing the 128MB stick and putting in a 512MB one made a huge difference. Night and Day. There's no comparison now, the laptop is much faster on everything but accessing the disk (not as noticeable on the external FW one).
I personally haven't tried running anything above 10.2.x on a beige box...technically Panther/Tiger aren't supported on that hardware and I didn't want to mess with xPostFacto. I do know that under Jaguar on three different beige boxes RAM made an enormous difference. I bought two from eBay and the guy I used to work with bought two...mine wound up being 233s and he had 266s. All had 64MB of RAM. I used a spare 128MB chip that was originally in my 300MHz beige when installing to those three. It ran alright, but by no means usable IMO with 192MB of RAM. We upgraded one to 512MB of RAM and it was much "happier" and noticeably quicker. Good enough for the 8yr old and 10yr old cousins I bought my two for at least.
You could always try upgrading the RAM and processor
. A G3 1GHz upgrade is around $210, a G4 700MHz is around $200. A G4 1GHz is around $350 and a G4 500MHz is around $160 (I'd grab a G3 before this one).
G3 1GHz upgrade ($209.99) + 3 x 256MB RAM (3 x 29.95 = $89.85) = $299.84 ((shipping not included))
Of course, by the time you do that you can almost (2/3rds of the way to) buy a Mini. They have some refurbished 1.25GHz G4 Minis with 256MB RAM and 40GB drives for $399 (free shipping) at Apple's online store (look for red save tag).