you don't, you don't re-encode avis at all providing you have the right (and pretty cheap) hardware. You can buy a flakey dvd player with xvid support for what, £40 at a supermarket/walmart/bestbuy/nettos/whereever. I'd suggest a modified Xbox myself.
You burn them as a data disc project not a dvd-video project, and then you put them into your MPEG4 capable DVD player (the Xbox being the most capable standalone MPEG4 player), and then you select the avi file from the list of files on the disc and hit play. Stuff like subs will be supported by most players, xbox supports
all formats, crummy standalones support srt but not vobs and other technical flaws related to their cheapness.
It sounds like you've not bought a dvd player in a long, long time? I would suggest an upgrade. You can get a second hand xbox with a 1 year warranty in the uk for about £50. For a game rental and a bit of work, you can then modify it and load on linux, and then its a matter of either networking it up to your pc or burning avis to a disc and playing from there. Its by far the most capable solution and if your scared of general computer work, you can pay a premium and get a hardware modified xbox for sub £100 (rip off knowing that softmodding is so easy, see pca's sticky topic guide).
Alternatively you can get a flakier dvd player that's "Divx Certified", although that might have trouble with advanced profile stuff.
In this day and age you really don't need to convert an avi to mpeg2/vobs, you just burn them as straight data as you would any other file backup to a DVD-r disc. The reason mpeg4s dominate emule and all p2p networks is because they are playable as is, otherwise everything would be dvdr isos and vcd isos/ mpegs
Subtitles are playable as is on most decent players. You just need to rename the filenames to match the avi filename.
Essentially, VCD is MPEG1, a totally antequated format from the late 80s, DVD-Video is MPEG2, a very old codec from about 1996, and MPEG4 is the replacement for both of them which is highly compressible, superior quality and a more manageable format.
I'd strongly recommend looking into buying an xbox and performing the relatively simple task of modifying it. Then you can forget about all this re-encoding/transcoding bollocks, and play the downloaded file exactly as is with no faffing