Select the DivX MPEG-4 Fast-Motion or Low-Motion codec in the Video Compression window and click on the "CONFIGURE" button. The Fast-motion codec offers better quality in movies with a lot of action and if you use a lower bitrate. In most other cases, the Low-Motion codec offers better quality, but may increase the file size. The A new window should open, and here you can fine tune the encoding parameters to suit your taste. Below is a list of what each of these options mean :
Keyframes - Increases/decreases the time needed to seek to a "keyframe" during forward/rewind operations - this option also influences quality. Leaving it too high means seeking doesn't work correctly. Decreasing it usually helps. A figure between 1 and 5 usually works. If you are using the Scene Detect Patch (highly recommended - improved quality), set this to a high value, like 999, to let the patch auto-detect where it is best to insert keyframes (ie. at scene changes).
Smoothness/Crispness - Setting it to 100% means the movie will contain very sharp/crisp pictures, but may cause skipping. Setting it to a lower setting, eg. 10%, will mean the picture is more blurry, but won't skip.
Data Rate - This is kind of tricky, but leaving it at the default 910 seems to work for most conversions, while 1200 will give you near-DVD quality (using the low-motion codec + scene detect patch). A lower value will yield a lower file size, and decreased quality, but also may introduce skipping and freezing (where the video stops, but the sound keeps on going). Setting it to high will mean that while your converted video is excellent, almost the same as the original .VOB, the file size will be large too, almost the size of the original .VOB file. Setting the bit rate too high may also introduce skipping as well. As a recommendation, 1500-3000 kbps for fast-motion and 1200+ for low-motion will give you good results. For more information on bitrates and such, please refer to Nicky Page's DivX Quality Guide.
You can use the various Bit-Rate Calculators to determine which bitrate suits you best, but most only work if you use the Low-Motion codec, as the Fast-Motion codec's bitrate is too variable for the bitrate calculators to work properly.
When you're finished, press "OK" for both windows that are opened.