Converting VHS to editable digital files for iMovie

Companies seem to offer AVI or Mpeg - which is better? Does it make a difference?
For optimum quality and editing compatibility, use a FireWire Analog-to-Digital Converter (DAC). There are many on the market but I generally prefer the Canopus line which produces a number of models in various price ranges. Depending on the actually codecs used, AVI files may or may not be edit compatible and would have to be re-converted to another compression format (usually DV) for using in most frame-level editors. If by MPEG you are referring to MPEG-1/2 files, then they also are not edit compatible and would have to be converted to either all I-frame MPEG-2 content with AIFF audio or converted to a compression format compatible with your editor. (Once again this is most often DV.)

If by "companies" you are referring to a service and not a DAV manufacturer, then I would see if they offer a tape option like Mini-DV if you have a player that will handle them. Otherwise I would re-evaluate what you plan to do with the content once it is converted (I assume you are talking about DVDs here) to a digital format. Basically you would be compressing your analog tapes to highly compressed format, decompressing the files back to an editing format, and then re-compression the edited content back to a highly compressed format for distribution and delivery. You would retain far more quality digitizing the tapes directly to a low compression editing format like DV which then becomes your archived data if ever needed again, editing, and then exporting to various formats having their own specifically targeted use.

It sounds like you are suggesting that I should have them transfer the VHS analot tapes into an uncompressed version - is taht you you mean by DV?
DV is actually a digital compression format -- I believe on the order of 5:1 which, for video, is not very compressed. Basically, each frame is a standalone compressed "information picture" and can be edited as such in a video editor unlike Group of Picture (GOP) formats which open with such a frame and then use "difference" frames to store changes between successive frames until the GOP ends and a new one begins. These files (like multiplexed M2V/AC3 files used on a DVD) cannot be edited at the frame level based on the method referencing data to previous frames. On the other hand, such formats are more highly compressed (say on the order of 15-20:1) and are very suitable as formats for the delivery and distribution of content. A typical hour of DV normally requires about 13 GBs of video data space or a data rate of about 25.0-28.5 Mbps. Depending on the type of audio included, this could double and is why DV is so well suited for tape storage over a DVD at say 4.5-9.0 GBs of total storage space.

Is DV a miniDV tape or can you save the file in a DV format on a hardrive?
An external, high capacity hard drive would be an excellent medium for transfer
1) If not transferring too many or too many at any one time
2) If the service can/will provide transfers to DV
3) If the service can write the files to an HFS formatted drive (needed for iMovie '08 to read them)

Some companies offer creating AVI files. Can these be read into iMovie or will these files also have the issue of too many cycles of compression and de-compression?
AVI is a file container used to contain "interleaved" audio content -- a of spatially maintaining synchronization between the audio and video content. QT, on the other hand, is a temporal media structure which synchronizes all content (audio, video, text, chapter tracks, text tracks, "Tween" tracks, etc.) are synchronized by an external clock reference. While the AVI file container is itself still supported by QT (even though its originator, Microsoft, dropped official support a decade ago), the codecs used to compress the audio and video content may not be supported. For instance, one of the current, more popular compression combinations is DivX/MP3. DivX is a proprietary, third-party video codec and MP3 audio is only supported by certain QT-based applications. Since iMovie '08 cannot access any third-party QT components, this file would have to be converted to one of the iMovie '08 "edit" compatible compression formats -- DV, AIC, Motion-JPEG, Photo-JPEG, and/or supported MPEG-4 or H.264 profiles with supported audio compression formats. So if you have a service create an AVI file that is not audio AND video supported, you will end up having to re-compress every one of you files to a supported format. You could, of course, switch to iMovie HD and, if the AVI audio/video combination is "conversion" compatible with QT (a lower requirement than being "edit compatible), then iMovie HD would automatically convert the AVI files as part of the import process. (I.e., if your open/create an iMovie HD DV project, then the files would be converted to DV. If an MPEG-4 iMovie HD project, then MPEG4/AAC.) Either method, as you noted, requires one extra cycle of re-compression before the content even gets into the editor for editing.

The vendor can convert the AVI file to H.264 format. Do I have to specify which audio compression format he needs to use?
If the H.264 video is to be placed in an MP4/M4V container, the audio will almost certainly be AAC. (I.e., you would not want an AC3 passthrough audio channel here.) If placed in MOV container, it could be anything. Most common QT compression formats would be acceptable -- Uncompressed, Linear PCM/AIFF, believe Adaptive PCM is now compatible, various signed/unsigned integer in Big/Little Endian order, AAC, as well as, a number of older codecs are supported. Would probably stay away from videos with MP3 at the moment as QT support seems to be in flux again. (MP3 audio files from iTunes are definitely still supported and I believe they can still be drop-imported from the finder but I have yet to install/test latest QT 7.6 changes. Don't accept third-party/proprietary H.264 formats (e.g., DivX or XviD) or those using profiles not currently supported by QT. Also remember this is highly compressed format.

IMovie v5 and 6 are designated iMovie HD and are based on tradition "timeline" editing of content. They are also compatible with third-party plug-ins which add special effects and filter options, as well as, internal chaptering, lower CPU requirements for use, and direct linking to iDVD for burning of DVDs. As an iLife '08 owner, you are entitled to a free download of iMovie HD v6.0.4 if you want it. Most User use bother applications depending on what the objectives of their project are. As indicated previously, this version will also convert non-editable compression formats to edit compatible formats as part of the import process if you have the proper QT components installed. Many users who cant or won't perform manual conversions for iMovie '08 use the older versions for this reason.

Is is a previous version of iMovie?
It is an older version but edits in a totally different manner. I.e., they are totally different applications that simply share a common name.

If so, will I have to but it and install it?
Program is free. Just press the link included above. Application will install in a Folder named "iMovie (previous version)" and both can be installed on your system at the same time.

Do you think that would be a better option than having them convert the AVI file to the H.264 format?
You would have to decide that for yourself. I do believe it is a good idea to have both available. Each has its own strengths and weaknesses. I use both, as well as, FCE, and FCP, depending on the type and depth of editing require for a particular project. For that matter, I also use QT Pro for many "quickie" edits not requiring a "full-blown" video editor.