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You can use Handbrake to convert a DVD to MPEG-4 or H.264 format (and the latest version of Handbrake supports iPod export)
Let's say you encode in H.264, using the maximum bitrate supported on the iPod (768 Kbit/s), a 2 hour movie eats up 675 MBytes.
And by the way, it has already be done, I've seen the Original Star Wars (Ep IV - A New Hope), ready for iPod, on a torrent site...