I made some extensive testing at home these 2 last days.

Here are the resolutions that worked well for me, depending the source video format (ratio and framerate)

For sources at 24 or 25 fps (24 is cinema, 25 is PAL video)

16:9 > 576 x 352
Wide > 640 x 272
4:3 > not tested


For sources at 30 fps (NTSC video)

16:9 > 480 x 288
Wide > 576 x 240
4:3 > 400 x 304

Encodings with Handbrake, from various DVD i have.
File were encoded to AVI with MP4 video
2 passes can be used, but bitrate should be kept as low as possible, around 600 to 750 kbps for video
(I prefer to keep single pass, because 2 passes will sometimes exceed the maximum bandwith ang give somewhat choppy video in full screen high speed action).
All audio was 44.1 MP3 128 Kbps