I read on http://www.labdv.com/en/manuals/dvdx_guide.php
that to convert from DVD to VCD you do not need to rep the DVd first to the hard disk. You just need enough space so as to save the whole MPEG1 file on your hard disk.

Also, on the same link they mention something about "How to split your PEG/AVI files by chapter" in part 6. has anyone tried it before. Does it make a smaller MPEG file for each chapter of the DVD or what?