Alright. I got it working, but it's not simple.

First, you need an mpeg2 directshow codec. Two options here,

1) Elecard Player - Free but has a watermark
2) Ligos Player - Cost money I think

Now, you need one more thing for vdub to work. Get a copy of avisynth. This will let you export an mpeg2 as an avi so vdub will be happy.

Second, I have found that you need to convert the m2a file to wav before you add it to the avi. For this, use either winamp or mpg123. Remember that it's 32khz file.

Here is the avisynth script I have been using:

DirectShowSource("prog.m2v")
Crop(16,4,464,476)

And then in virtualdub, I open the avs file, and add these filters:

Deinterlace - Duplicate field 1
Resize - Precise linear to 320x240
Temporal Smoother - for cartoons

Then I set vdub to use WAV audio, and select the wav.

For compression, I use:

Divx 600 kb/s 100% crisp
Divx Audio - 64kb/s 32khz

I probably left out a few parts, but this should be a good start.

PS: I find that I have to adjust the audio timing sometimes. For instance, on one file I had to set audio to start at -100 ms.

--Tom