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Sounds like it would probably work. The iPods don't really like long sustained transfers of data, from what I've seen; they get pretty hot and the screen goes all black. After it cools down again, the screen looks good again, but I don't know if there is any underlying damage.
If you can, I'd borrow a regular external hard drive; perhaps a local store does one day loans/rentals, or you have a friend with a nice whomping external that would have all the space you would need.
If you are worried about all the pr0n that you are transferring over ending up on someone else's transfer drive, don't forget that OS 10.3 has government-level data erasure features!
If you use the iPod for the transfer, make sure that the iPod has been formatted in Mac HFS+ or similar, not a Windows format (like FAT32); otherwise, you might loose al the icons and such.
It sounds like you don't have a standard backup plan; remember, data loss will happen to everyone someday.
Regaring software reinstalls; it would probably be a good idea to do reinstalls rather than copying the folders over manually, in case the installer spreads other files around; I've never tried it myself.
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