This is asked weekly.
Easiest method with 100% transparency to source:
1. Rip with DVDfab HD Dycrypter
2. Encode with Handbrake (High Profile - Film preset)
The "High Profile - Film" preset uses x264 to encode to an H264 file, grabs the DD audio and puts them both in a (roughly 1.4GB) MKV file.
If people tell you to use XviD/DivX and .AVI containers, tell them its 2009 and to move on. There are better things out there.