In my case I already copied the VIDEO_TS folder to my hard drive.
Here is the command for mencoder:
mencoder -dvd-device "myvideobackup/VIDEO_TS" dvd:// -ovc xvid -oac mp3lame -lameopts cbr:br=128 -xvidencopts pass=2:bitrate=-700000 -o myvideobackup.avi
Replace "-dvd-device myvideobackup/VIDEO_TS" with the location of your backup files or the /dev device of your DVD drive.
The -o myvideobackup.avi is of course the name o........
Mencoder is great, you can throw anything at it, including video files from your camera and have it encode into xvid or almost any other format.
In my case I took 640x480 video from my Canon and reduced the size by 1/3 with the options below (there are many other options that you can read about in the manual but I like to keep it simple).
Mencoder Encode
mencoder -ovc xvid -oac mp3lame -xvidencopts fixed_quant=4 -o ........