After many years of trying, I have finally managed a good (enough) solution to playing video files on my TV. And to make it more desirable, last year, we finally bought an HDTV. I had bought an upconverting DVD player a few years ago for when we did finally do it, and it worked well enough, for awhile. It was just too slow, and unreliable. So when I finally upgraded the wife's computer, I used her old hardware along with some other pieces I had laying around to finally build a media PC. I will never go back. And the family is almost ready to go for a more expensive (really only a few hundred) solution.
Initially, I talked everyone into just running DVDs as normal, using the optical drive in the machine. 
Windows does a much better job of scaling video than any consumer device I have used (or can afford). Then I started ripping them to files. I have been doing this for years, but not very successfully. Decrypting the discs is easy. Getting a good transcode has never been satisfactory. Then I found avi.NET. This great little tool does only one thing, but it does it very well. It takes the decrypted DVD files and encodes them to an AVI file. It has very few options, but does a really remarkable job.
When encoding a video, I personally never use a fixed bitrate. And the actual size of the end file is not strictly important to me, so I never choose the default option either. I always choose the quality setting called Single Pass Quant. The value used is dependant on the source video. Animations tend to compress very well, so can use a higher value than FMV. I tend to use higher numbers on the kids movies and lower on the movies I want very high quality viewing. Like LAME, lower is better quality. Below 2 makes for huge files, and above 6 starts to impact quality.
The screen.SIZE attribute allows you to reduce the overall resolution of the output movie where 720 is typical max horizontal resolution for a widescreen DVD. The aspect ratio is usually very accurate, but can be adjusted if needed using Height. I have only had to do it 1 time, and then on a foreign title. The Deinterlacing Filter works very well where needed and occasionally I will use the Smooth/Sharp if the source quality is poor. Always use HQ mode; it makes the process slower, but it is very worth it. I have not found much difference between DivX and XviD, except that DivX will thread across all 4 cores of my Q6600, so I use it, where XviD only seems to use 2.
It may take some experimentation as I am sure Your Mileage May Vary, but I am very pleased with results. Sometimes I do have a problem reading some DVD rips, but running them through DVDShrink with no compression has always worked. In fact, DVDShrink is a really convenient way to pick the tracks you want to convert and rip them to a convenient location.
Keep in mind that avi.NET is only useful for converting DVD .vob files. It will do nothing else. For that I use MediaCoder; but that is another show.