You can't use iPod HardDrives to boot and run an OS on. I mean, you *can* but they die VERY easily after extended use as a boot-device. Until something more reliable comes around (or flash capacity become cost-effective in large amounts), the 2.5" Laptop HDs will have to do.
What's wrong with a USB Flash device? Even a 4GB one (approx. single-layer DVD capacity) is around $50, PLUS they're small, PLUS they're easy to carry around, PLUS they're instant Read/Write (limited only by the speed of your USB port). Compare that to a DVD. The only thing you wouldn't be able to do sans optical bay is watch physical media. You could, just as easily, rip a few DVDs and encode them as h.248 and watch near-DVD quality movies from a device the size of your thumb. To save yourself the hassle, you could set up an Automator Script to automatically rip and encode your DVDs when you insert them.
Think outside the consumer box.
-Clive