I am currently looking into both custom LED and LCD options, but LCD's react slower than LED's, so LCD's may not make the grade. They can both be made to look much like the VFD displays. A new post has been started for the project, titled: "HP/Agilent 53131A/53132A/53181A Conversion to LED Displays".
As for the encoding, it's actually considered decoding, and it is done in the processor on the main board. The data, in this case ASCII character data, is encoded binary data, not meant to be directly read by humans. It is decoded to be displayed. The data is sent serially with a clock, not unlike SPI, but much simpler, as there is only clocked data sent. No addressing, or programming of registers. The only returned data is that which was clocked in with the previous 32 bits, as the next 32 bits are clocked in. For more information on this method, look up a simple version of the IC used for the VFD, called a 74HC595.