I saw this and thought I should register and help you out, this is going to be a bit lengthy.
http://www.doom9.org/ will walk you through the basics, just click on their guides section and go for the first option(MPEG4). You definitly want to use Xvid, which is generally considered the best MPEG4 codec currently available, and is free to boot, actually, everything I mention is free. From there it depends on how in depth you want to get.
Since you're just beginning, and probably don't care much about the ins and outs of encoding, go for the Auto Gordian Knot option. You will be able to specify the target size for your file, which will determine quality. Autogk is, as the name implies, totally automated, so it should be pretty easy to deal with. Voila, from DVD, to high quality encode.
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If you want to use what you've already done, you could recompress it I guess, instead of DVD input in autogk, select file input, and specify your target file size. Obviously the quality of compressing something already compressed will be less than ideal, but if you're going for small size, it won't be noticable.
This is probably your best/easiest route.
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If you're looking to cut a certain portion out of your DVD and only want that portion as your result(and it sounds like you are), you've got 2 options: You'll need to add a few steps to the encoding process, which is much more complicated, and much longer(I don't mind going through it though), or you can go with the autogk method above, and crop the result, which is easy to do in virtualdub mod.
