I'm not sure exactly what you want to do with the subs, just hardcode them?

You can do this with VobSub and VirtualDub or AviSynth -- look here for example (much more can be found by googling):

http://forum.lowyat.net/topic/304260

There are probably some settings in vobsub for tweaking the look of the subs.

For editing I'd ALWAYS render my video (now with subtitles) out in either huffyuv or lagarith lossless codecs -- they take up more space but it's much more fast and accurate than working with some compressed mpeg4/h264 stream. And no quality loss of course.

If space is an issue, there are other options like DV codecs but I don't much about that, or editing the vobs/mpeg2 directly in womble, it should only re-render changed parts, but don't know much about that either.