Did some more playing around, and I found I really hated the audio in the recommended encoding, so this is what I came up with:
mencoder dvd://1 -aid 128 -srate 48000 -vop scale=400:300 -o /home/david/movies/zaurus/Transformers_Z2.avi -oac mp3lame -lameopts preset=96:mode=0:vol=8 -ovc lavc -lavcopts vcodec=mpeg4:vhq:vbitrate=175:autoaspect -ofps 15 -sws 2
The preset=96 gives you 96kbps audio MP3, and the mode=0 gives you true stereo. The file size is not too bad, less than 200 meg, and it can stream over my wireless 802.11b network. Time to get a bigger compact flash card.