I have used decrypter and shrink combination and burned many
dvds. When upgraded pc from window 2000 to xp pro and
updated decrypter to 3.5.1.0 and shrink 3.2.0.15, I strated
to see problem in video.

Watching video from video folder generated by decrypter
using file mode, video is excellent using power dvd or
vlc player.

Now compressed about 60 to 65% using shrink, keeping all
default settings. generated iso. Using same vlc player,
watching video on my pc, I did not like quality of
the video. Constantly I saw "bricks" effect, light
flashing or stuttering or flickering, and minor freeze.

When I burned using memorex 8x -r at 4x, same appers
on disc also.

My question is why orignial decypter folder do not have these
artifacts and how come it is included in an iso image. Note
that this is stated after using shrink 3.2.

This would be because Shrink has compressed the movie - the higher the compression (the lower the number given), the worse will be the quality. You stated that you compressed 60 - 65% using Shrink. This would definitely be noticeable. Decrypter doesn't compress, only rip & burn. No compression = no loss of quality!

Welcome to the forum.