I know YouTube resizes to 320x240 and re-encodes anything you upload into FLV format, but I don't know what formats they accept or what size/time constraints they have on uploads (as I've never actually uploaded anything to YouTube myself). I assume they won't accept raw VOB sections split straight out of your DVD source?
You can probably help things along by doing the resizing yourself, but from what I understand the site will alway re-encode your video, even if you submit it in FLV to begin with. To begin with I'd try submitting a 320x240 Xvid AVI file and see how that looks.