First... AVI and MKV are file formats that hold video and audio streams. They do not, of themselves, determine the quality of the video/audio streams held within. AVI is not "more compressed" than MKV, or DVD, or Blu-ray. The video stream INSIDE the AVI file can be just about anything. Same for MKV. Know that, first and foremost, and you'll make much better decisions down the road. Now... the choice between a DVD image (ISO) and movie files (MKV/AVI/etc..) is largely based on how much of the "stuff" on the DVD is important to you. Personally, I only want the movie. I hardly ever touch the rest, and if I want to, I'll get the disc. I'll probably never look at it again after that. You can use some tools, like AnyDVD and DVD Shrink (there are others) to remove parts (like ads and trailers and FBI warnings) while keeping most of the structure in-tact. You can also pull out the streams (foreign audio and subtitles) that you won't use to save space. Your end result is an ISO file, with presumably 0% quality loss. Watch out though -- as some tools (like DVD Shrink) will also optionally re-compress the video at a lower bitrate to minimize the size, but this reduces quality, so double-check before you start the backup process. Next... the conversion to files: MKV is far more versatile than AVI, as it handles multiple audio streams, subtitles, and chapters. AVI is suitable for 1 video stream + 1 audio stream, but your codec options are a bit more limited. Assuming you want MKV (you do), there are a ton of tools to help you convert movies or episodes from a DVD into MKV files. AutoGK, Handbrake, RipBot, MakeMKV, etc.
