Do you recommend I do it another way?

[capman21]

Guys my main purpose is to keep my dv files on hard drive and keep a small size and the best quality I can get. This is what I have been doing.

1.transfer the dv file via firewire to pc
2.open in virtual dub
3.I use these 3 filters...Smart Deinterlace-Edge Directed Interpolate.....Resize-704*480-Lanczos3.....Sharpen*12
4.Compress using Xvid at 4000 kbps

Quality is good, but is there you recommend I do different to maintain the absolute best quality?

[redwudz]

If you are happy with the results, that's the main thing. If you want minimum filesize and fair quality, you might expirement with the H.264 codec. It's a little more advanced than Xvid. https://www.videohelp.com/tools?tool=x264_VFW_Codec

[edDV]

...
Quality is good, but is there you recommend I do different to maintain the absolute best quality?

What is your future intended use for these files?
Assuming this is camcorder footage, software deinterlacing is destructive to quality and can't be reversed.

[capman21]

Main purpose for these files is just to keep them on pc, but I burn and keep backups of all my original dv files. BTW, this may sound stupid, but if a dv file converted straight to a dvd would be a perfect 10 as in quality. What do you think the above method I mentioned would be?

[edDV]

1:1 DV format would fill a DVD-5 in ~20 minutes.

Your method requires deinterlace. A motion adaptive deinterlace can give good results but software methods done right will take long processing, longer than most will tolerate. So shortcuts are used at the expense of quality (motion artifacts). This isn't much of a problem so long as you keep the raw DV file as the archive backup.

Future h.264 MPeg4 hardware encoders (realtime) will maintain interlace and offer compression down to 4000Kb/s without much loss. Software versions of these encoders will need a beefy CPU.

Hard to put your method on a 10 point scale without knowing the display. It will look OK on a smaller progressive screen. Deinterlacing artifacts will be more noticeable as the screen size goes up.