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I would suggest s-video straight through the whole way -- not composite. S-video is a higher grade signal. That's where the comb filter worry comes from.
Avoiding H.264 is for standards. There really is not a set standard on H.264 yet, not for broadcast, web or even Blu-ray -- temporary standards, yes ... final, not really -- so I'd stay with something that is firmly final. MPEG-2 for DVD-Video is a final format, it won't change. There will long be legacy devices for playing DVDs, but H.264 in its current form could disappear much like Divx has. Whether Blu-ray is a force to stay has yet to be seen, early response is still highly unimpressive (think Laserdisc!). Some would argue all this, but I err on the side of "archival safety" here. Most arguers do so from the side of fanboyism and techno-geekiness, they're not thinking long-term from a realistic point of view. Go with the devil you know.
DVD specs are already above the VHS data, so you're not going to lose anything going with a DVD< now will you really gain much from converting to Blu-ray. If this were something shot in the past year on new-age tech, this conversation would be fully different.
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