VirtualDub is a great tool, not only for editing avi's, but for testing your avisynth scripts. It is very easy to install and use.

In order to convert mpeg-2 files (including VOB files) to blu-ray compatible AVC files, we'll need a reliable, accurate, and transparent mpeg-2 decoder that will work as a source for any encoders. Avisynth with the DGMPGDec and decomb plugins fits the bill.