Example of original Hardsubbed a.f.k. video:

I want to encode with h264, and I'm using Xvid4PSP(I don't know if this is best tool to encode with), but this is what I got with my first encode:
DVDrip x264 with Xvid4PSP settings shown below:

These are the Xvid4PSP settings I used:
Video MP4 h264:
Aspect Ratio: 4:3
Resolution: 720x536 (suggested by Xvid4PSP to get a 4:3 aspect ratio)
Encoding Mode: 2 Pass Quality
Quantizer: 16
AVC: High profile
AVC Level: Unrestricted
Bitrate I got with these settings: 1740
Audio:
AAC-LC 256k
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Original Video

Original Video Stats MPEG2:
Aspect 4:3
Input Resolution: 720x480 (I guess it gives me this resolution because of the kind of pixels a DVD video uses)
Bitrate: 7800
As you can see the video looks a lot better in the original (the black outline of the characters looks better, while the encoded one brakes down)... and the resolution is 720x480 with some dark areas on the sides (8px on right and left) cropping that would give a video of 720x464... But now instead of an Aspect Ratio of 4:3 I get one of 1.5517...
I mention the aspect ratio, because I'm guessing the video would look better if I don't do any changes to the Resolution... Even though Xvid4PSP is suggesting me to do a 720x536.
by the way I already have the Original MPEG2 video and Audio in an MKV file... Should I consider releasing with this 1.5 to 1.8GB files... I don't think so uh?