I bought a Pyro AV Convertor to do the same thing (rip tapes to digital format). Works great, iMovie recognizes it as a video camera, and records the video in great quality. Can also be used to record TV, videogames, or anything else you can plug into RCA ports.
Mine is RCS > Firewire, but I'm sure there's a USB2 version, too.
After you import the footage, just use the "share" option to convert it to iPod format, or export it into .mov or .mpg, and use something like iSquint to convert it to iPod.