480x480 isn't a whole lot worse (on a non-LCD screen) than 720x480 (because vertical lines of resolutions on most sets are less than 720 in chrominance, although luminance is usually around there in recent sets).
Given that VHS is about 320x240 in resolution, and many people are still happy with that resolution, I don't think 480x480 is all that bad of a trade-off.
As for battery life: ever hear of a charger? I imagine if I was going to use my iPod for a night of movies I could afford the slight inconvenience of plugging the charger in!
All in all, I could certainly see myself plugging this in to a friend's TV set and sitting down to watch a few of my favorite movies or shows. "Could" because as of yet there's no way to get CSS-protected DVD data onto the iPod (without using gray-market DeCSS tools) and only two shows available that I'd be interested in seeing (and, frankly, I don't know anyone who's not already addicted to Lost and I'm not interested enough in DH to show it off to anyone).
Things will get a whole lot more interesting after this "test" project takes off and we get essentially the entire TV library on iTTVS, and/or the ability to rip DVDs to an iPod (which, as I've said before, is really just a matter of Apple getting the iPod certified as a CSS device and then licensing the CSS keys).