Well this is a commandline that I found worked fairly well for a widescreen dvd (Indiana Jones - temple of Doom). Could probably up the bitrate and still have it fit on the SMC...
Pass 1:
mencoder dvd://1 -dvd-device /dev/dvd -alang English -oac mp3lame -lameopts abr:br=10:mode=3:aq=0 -af volume=8:sc -ovc xvid -xvidencopts :bitrate=130

ass=1 -vf pp=de,eq2=1.0:1.5:0.1:1.4,crop=716:410:2:82,scale=320:-2 -ofps 10 -srate 11025 -o "/dev/null"
Pass 2:
mencoder dvd://1 -dvd-device /dev/dvd -alang English -oac mp3lame -lameopts abr:br=10:mode=3:aq=0 -af volume=8:sc -ovc xvid -xvidencopts :bitrate=130

ass=2 -vf pp=de,eq2=1.0:1.5:0.1:1.4,crop=716:410:2:82,scale=320:-2 -ofps 10 -srate 11025 -o "/root/indy3.avi"
It seems to play quite well. Unfortunately if I fastforward it then it gets out of sync:-( Works on the PC so I guess its just a GPCinema bug. Anyone know how I can fix it?
Notes:
-srate = Set sample rate (Hz)
-lameopts abr:br=10:mode=3:aq=0 = The 10 is the audio bitrate, mode 3 is mono
bitrate=130 = the bitrate!
eq2=1.0:1.5:0.1:1.4 -> adjust the brightness, contrast, saturation (see man page)
I think you need to make sure final size is divisible by 8 in each direction
BTW I'm using Debian unstable with mplayer/mencoder from marillat.free.fr. I used acidrip as the frontend. Most of the above options are available in the GUI. The rest you have to put in the additional options boxes!
Mark