Hey Bally,
a few months ago i tried to do exactly the same as you
using the exact same progams ending up with the exact same results.
Over the recent holliday i've finally got it cracked and i'm now watching some great quality dvd movies that were originally
downloaded in various divx avi and mpeg formats.
To do it your going to need a good spec pc with plenty of hard drive space bit of help a few good programs
many of which are shareware or demo versions and are easily
obtained.
Such as TMPGenc, Virtual dub, Ifoedit, Besweet DVD Decrypter etc.
You will also need to get your printer ready to print out the tutorials.
First have a look at this link to get started.
http://www.vcdhelp.com/tmpgencdvd.htm
There you will find all the info using the tutorials and following the
different links to the programs required.
It might look a bit daunting and confusing but don't worry about it.
Contact me through my PM and i'll help you get them all set up and which to use first etc.