I stand by my answer, simply because everyone should go for widespread compatibility 'cause who knows what will happen down the line. I will expand a bit however
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-For video quality, now that H.264 is around, it's the only way to go.
-For containers that natively support H.264 there's mkv and mp4. I recommend the mkv as a long-term solution, but until Microsoft wakes up, mp4 is your only option for Media Center Extenders and WMP library support. The good news is that once you've got your video and audio streams encoded, you should be able to remux them from one container to the other with minimal fuss, without re-encoding. So you could make mp4s now, and remux them to mkvs later. (If this isn't right, someone please tell me.)
-Audio is a bit less straightforward. On the one hand there's mp3 and aac, on the other there's dolby (ac3) and dts. I don't personally don't recommend ac3/dts: first, they're not universally supported. Second, mp4 doesn't support dts at all. Third, you might want to re-encode to a lower bitrate than the original DVD anyway (and possibly downmix to stereo), so you might as well stick to a more mainstream codec.
-Stereo or 5.1 is another interesting question. If you want 5.1 then you're doing aac because mp3 doesn't support it. I don't know how widespread 5.1 support is in devices - I'd love it if every device could either play or downmix it, and if that is the case then you should definitely use it. The DSM-750 is particularly stupid here, because it downmixes before outputting, even if you use digital out to a 5.1 home theater. All I have to say there is, grr.
And a few quick observations regarding your previous attempts:
-xvid/ac3 can look and sound fantastic, as long as you encode it right (point #1 is make sure you're using a high enough bitrate). There's absolutely nothing wrong with either codec. But as I mentioned above, now that H.264 is around...
-H.264 is not recommended in AVI containers. It can be made to work, but just don't do it.
-H.264 will make your processor work harder than xvid. It looks better (at a lower bitrate) because it uses more complicated compression techniques, and it takes more "brains" to decode it. H.264 is also very scalable, meaning that you can really crank the compression settings to get a slightly smaller file, and you'll need that much more CPU power to decode it. That's why I mentioned DivX's specs, because it keeps things reasonably CPU-friendly while still looking great.
Just remember that both xvid and h.264 can look great, as long as you're using the right encoding settings.
Hope that helps...