guess I'll help you out a bit

A typical fansub involved these steps

1) a Japanese person captures a raw and puts it up on a filesharing program, typcally one known as "winny"
2a) a raw hunter from the fansubbing channel scours winny looking for said raws
2b) if the channel has someone in japan to capture the raw for them, he uploads it
3a) translator gets the raw and goes to work on it
3b) sometimes a 2nd translator will double-check the work of the 1st
4a) at this point usually an editor will correct the english
4b) they may have a 2nd editor look over the script once the 1st edit is done
5) a timer will make sure the words line up with the video
6a) a typesetter will set the fonts/colors/screen position of subtitles
6b) someone will time and typeset the karaoke that you see in the openings and endings
7) an encoder will take all this stuff and mash it together and make it look pretty
8) a quality checker will look over it to make sure it's good to go

As far as subtitles, 99% of fansubs use SubStation Alpha to do their subtitles. you can enter subtitles, time them, chose fonts, colors, screen positions, and special effects with this program.

As far as codecs, DivX5.x and XviD are the 2 most commonly used but some people will use RMVB or WMV9.

As far as getting videos high quality at small sizes, you can take a look at www.doom9.org and learn some things