I would intend to encode with XVid, just because I have used it before in tutorials and the like (if you would suggest something else I am open to be swayed on this matter).
I would then like to put this into an MKV with subtitles audio streams etc, which isn't that difficult and I have done before with success. Really the main part is encoding the AVI, but as I said I have always struggled to really understand what half of the stuff means and that is why I made this post.
I shall post some screenies of the VOB's I have at the moment that I am working with!
I took some pics of what I think are useful shots of the type of things that I will have to deal with. Rather than spam the pics here I made a quick web page
www.jpopulous.org/dm9/test.htm
Also, I don't have very much web space... so I did a quick 80% encode of a fragment of the vob file with WMV9 ^^;
www.jpopulous.org/dm9/vob.avi
Just let me know if that is enough information for you to start with.
Also thankyou for your response, I appreciate it!