You can use a tool like daemon-tools, which has been mentioned. Using that you can mount the ISO into a virtual drive so a PC software DVD player can play it, just like a real disc were in a real drive..
When it comes to making AVI's etc.. it gets more complicated.. A lot of people use software to encode the DVD files into AVI's or MPEGs..
These are usually very low bitrates, compared to actual DVD's, and in order to keep a good quality image, even at a respectable bitrate, without a huge filesize, you have to apply filters.
I use TMPGEnc Xpress 4, and DVD Author 3 w/DivX authoring. Just as an example, I am making some DivX AVI's for my brother. He has Trigun on 3 dual layers. I am putting them all onto one dual layer (26 episodes). Using DivX with the highest quality settings, 2 pass variable bitrate (1800kbps) and also applying filters to clean up the image (the original is shitty quality and it was a 1:1 copy of a retail set) and each file comes in at around 290-300MB.
It looks better than the original source, but can take around 3 hours to encode one 21minute episode as a result. Time well spent imho.
I'm also redoing my Gundam SeeD set.. 50 episodes onto 2 dual layers, full MPEG2 standard compliant DVD.. again with filters. A lot of noise reduction, some sharpening and a bit of bluring.. Looks great at around the same file size at Trigun, only they are MPEG2 files at around (edit: 1700kbps) or so I believe.. VBR of course. My MPEG2 files actually look a little better than my DivX files do on TV I think.. and the mpegs are only 352x480 resolution.. The original source is 640x480, but I'm doing a 720x480 (Mpeg2 DVD's only allows 352x480 & 720x480 video to be compliant) to test and see how it looks. (edit: 720 looks horrible, need to find a better upscaling program probably)
You can do amazing things with proper editing software. As long as you have the time, CPU power, and patience..
TMPGenc's software suites are very easy to use, even for absolute beginners I think. And if you get stuck with something, they have good detailed manuals, that explain what options do, etc.. Both programs can import all the usual media files, and also import DVD files right off the disc if you need. Support for subtitles, dual audio tracks, and dolby digital/PCM/MP2/MP3 audio, etc.