I'm suprised not more people are on board the XBMC boat. I'm running an HTPC with 2TB and xbmc. Haven't touched a dvd in over a year. Anyhow I'd love a good quality x264.
Handbrake will apparently take uncompressed AVI without problems.
See here:
https://forum.handbrake.fr/viewtopic.php?f=11&t=18112&start=0
Good luck!