So, after all my research I have come up with the following settings. Much help to digitalfaq and the forums here. I have actually doccumented my experiences going through this in hopes that it will help someone else. I will post it when I can get all the stuff I gathered in a readable format.

Here is what I have set up to get the best results in digitizing VHS tapes(from 1996 of concert footage) that can not have any quality lost. Quality is very important as the tapes are sometimes already 3rd/4th generation. Yes, I know garbage in, garbage out. But i'd like it to be garbage in-garbage out rather than garbage in - greater garbage out.

Please look this over and see if you have suggestions or comments:

AVI CAPTURE w/ ATI TV Wonder Pro card with ATI MMC 9.03 software
- NTSC,NTSC-J, PAL-M Format
- 640x480 Resolution
- Huffyuv video codec 2.1.1 - CCESP Patch v0.2
- "Predict median" YUY2 Compression Method
- "Predict gradient" RGB Compression Method
- 480 Field Threshold
- 29.97 Frame Rate
- PCM (native) Audio Codec
- 48.000 KHz, 16 Bit, Mono
ENCODING w/ Virtual Dub 1.5.10 (build 18160/release)
- DIVX 5.2.1 codec
- 4000kbps Average Bitrate
- 1-Pass Encoding
- "fast" Psychovisual Enhancements
- 480x352 Bicubic (normal) resize
- De-Interlace source
- 300 Max Keyframe interval

File Sizes:
7.49mb per seconnd
449.69mb per minute
26.35gb per hour

Regards