I just backed up my copy of LOTR w/DVD 2one and I do notice pixelation in the darker scenes like the nightime shots. If you look when the camera pans you'll notice pixels appearing. I used a HP 200i w/+RW. It's pretty good but.......what do ya do. Do 2 discs or one at this compression? I did the same thing w/DVD Shrink......same exact pixilation. I got down to level 6 which was 41%. I have a Sharp 31" tv and it looks good but still some loss. I don't think 175 min. movies do good with this compression. I split Godfather to 2 discs for this reason. Just my findings guys.
Obviously it is always better to have it backed up as a 'raw' imge, ie uncompressed. With compression you can loose quality. However, in saying that, the pixels you see shouldnt occur. I know that this is a problem with DivX and Xvid at times, but with Mpeg2 compression it doesnt seem to be apparent!
On a similar note - I compressed Terminator 2 (Special Edition) using DVD2One, and I noticed a bit of pixellation in certain scenes, usually where there's an explosion or a fire in shot. Slightly annoying, but definitely preferable to splitting the movie to 2 discs IMHO. I suppose it depends if you can live with these things, or if you're a bit of a perfectionist. The fact of the matter is you simply cannot take a dual layered disc, compress it to 4.36Gb and expect to maintain 100% quality. It just don't work like that!