Circles turns to "eggs" in video when converting with srt subs

[grossmisconduct]

Hi! I have a problem with converting AVI to MP4 and adding srt subs. Circles turns to eggs(clearly illustrated in Universal movies with the earth logo). First I tried converting with different aspect ratio options with no luck. Then I discovered that this only occurs when I add subtitles. I have also tried different subtitle files, but still the same.
I am using Total Video Converter and Xilisoft Video converter, both with the same results.
I am aware that it might work using Autogk by adding subtitles there, and then converting to MP4 with some other software, but I would like to do both in one process if possible.
I am in the process of getting info from Xilisoft and Total, but there seems to be a lot of competence on subtitless and converting here so I figured Id ask here too.
Do you think there has to be a problem with the internal decoders in the Tolal or Xilisoft software, or may there be a problem with decoders on my computer?
I have AviSynth and Vobsub installed, if that means anything..

[Baldrick]

Have you also tried different resolutions/frame size because just display aspect ratio might be ignored in some players.
And you can also try move the subtitles so they are inside the video and not outside in black borders, adjust the position inside vobsub.

Or try instead Xvid4psp, load your avi and subtitle and choose a mp4 profile.