Yes, it is illegal to do, but there are tools out there to do it. You will need to rip the dvd first, using FairUse, DVDDecrypter, DVD Shrink, etc. Then, DVD2PPC should be able to convert it and re-size it for you. I am currently using DVD2PPC also; it seems buggy, but does work. Pocket DVD Wizard and deset Video Maker are much better programs. I found out only after buying DVD2PPC. Seems like I wasted some money.....
If you need more help, let us know.
Here's a great tutorial I've read (it's the top 'stickie' in the multimedia forum):
http://www.aximsite.com/boards/showthread.php?t=70567