we don't work with compressed video at all. The only point at which we compress is the final render - meaning of we are putting the video on the web or CD. If it's going to broadcast, generlaly speaking, there is no compression done.
There is one exception - certain video cards or programs have proprietary video codecs that are lossless but very tight. In those cases, you can compress with no real loss - however, only poeple with those programs or hardware can see the videos. That's why, in the final render, you depart from using that codec, and render uncompressed (or in a compression format people can see on the web, if that's your target).
That said, I'll ask people here to sound off about their favorite codecs for keeping the quality up. I've heard that Huffy is apretty good one for nearly lossless quality, plus DivX is pretty good. Not totally pro, but for good quality, it's a decent solution for your interim renders.
So, should I infer that the background avi should be uncompressed?
If so it will be a big file - won't that slow PI down to a crawl as it tries to manipulate the fields? I've not checked recently but I do remember using a big background avi once and it took ages to move the frame count up and down.
PS would like to know what the popular Codecs are!
you might consider using a compressed video in the BG for preview purposes and then swapping it out for final render - if you are compositing in pIllusion.
You could also render an image sequence (Like Tiff TGA, PNG) from your 3D app. pIllusion can read those.
Also, you could composite your 3D and 2D in a compositing program like After Effects.
Again, in answer to your question, most pros wouldn't do their compositing directly in pIllusion because it's not a great program for that - it does a good job on a basic composite, but for anything more complicated then dropping particles on a BG layer, you start to get diminishing returns - it can do it, but it get's more difficult and isn't as flexible as programs designed to do compositing, or even an NLE that can use particle rendered as, say for example, TIFF with Alpha.
If so it will be a big file
I'll tell you what I tell all of my students when they ask why they need to buy a big harddrive: Video and Animation requires a lot of space if it's to be done right. I have 750 Gigs of external space, and I always want to buy more... That said, You can always erase the big renderes once you do your final render. So you can do OK with even a single 250 GB drive. they aren't that expensive.