Macromedia flash is the program to use, in my opinion.  A fight sequence would be a subroutine that, when exited, returns to  a main routine and brings a player back to a previous menu.

Important to keep in mind when making an interactive game: EVERYTHING!  You have to consider every possible situational outcome a player makes, and have a place for the character to have a result for each action.

Sony Vegas is easy for adding subtitles.  You can learn how right from the program's help file.  I just make a video channel for text, make an event for each subtitle and type it in.

If you're planning on uploading it to YouTube, then Flash is out of the question. You should make each part as a separate video, upload them all, and connect one video to the next (or back) by annotations.

Take a look at this: http://www.bricksinmotion.com/films/view/5645

"Nothing goes down 'less I'm involved. No nuggets. No onion rings. No nothin'. A cheeseburger gets sold in the park, I want in! You got fat while we starved on the streets...now it's my turn!" -Harley Morenstein

Hey Jampot thank you for your response firstly, I have seen toothache which is a great interactive game and it will be similar to that were you have your options and stuff I will be using annotations as thats were I am confused and I hope you can help me out as I know you have done a few of these.
Especially with your superhero series is, once I have the first choice done how can I go back to the original state of the character and its position in regards to going to choice 2? Is were I am confused. I would really appreciate your insight as you have experience in this field.

HoldingOurOwn yes thats correct it's going to be somewhat like that however it will be more film than interaction but it will allow for interaction I am aware I will have to connect videos together by linking and putting in annoatrions but as said to Jampot I am more confused as to getting them from choice to choice from the characters original position.

Hey Pritchard Studios thanks for your response.

You have a great response here and appreciate the tips provided.

But I don't know if I am explaining it very well.

I think this will explain it much better, for the part I am stuck with.

Alright so heres an example.

Officer: What are you doing back here in the restricted zone?
You: (TWO choices)
        1. My dog ran into here I was merely looking for it.
        2. I wasn't aware this place was restricted.

You see there you had two choices for this kind of interaction your character would be in the same spot as he is answering a question depending on how he answers it would determine the outcome of the officers reaction in which this case your character would be still in the same position. So what I am asking is say if you elected the first option. You would animate the character responding.

But then how would I get him back in the exact position as the original shot before I started animating him? I hope thats clear enough.

Also even if you were to redo it from choice 1 and want to try choice 2 as you said, would you not at some point have to go back to the same scene as choice 1 in order to choose a different outcome for choice 2? Please correct me if I am wrong. So my initial question is how can I return to the normal state of the characters position without having to retake the photo as it would slightly move the original state of the character and its position.

Sincerely,
Divine.

Yep, you use reference pictures and onion skinning to get the right look.
Also, since people are following the link to a different video, they won't be able to tell if there is a microscopic difference in the fig's position. And to top it off, you could change camera angles at the cut and give yourself even more wiggle room.