There are tons of movies on Crackberry for Blackberry Storm, when will someone start making movies formatted for Droid to take advantage of the WHOLE screen?
854 x 480 has certainly not been the usual screen resolution for mobile phones. However, I really hope it becomes the new "320 x 240" for all upcoming devices.
In North America, DVD sources are encoded at 720 x 480 (1.5 aspect ratio) with the vertical component often scaled to fully fill a 16:9 screen (1.8 aspect ratio) upon playback. So you wouldn't necessarily be gaining any quality from re-encoding it at a higher resolution. Although, you would however, end up with a larger file size.
I am currently waiting for the Milestone to arrive in Canada, so I don't know if the Droid natively supports upscaling 16:9 video source for full screen playback. If it does, then, I would simply re-encode your DVDs to 720 x 400, and let the droid scale them to the full screen.
On the other hand, you could get beautifully sharp video if you re-encoded 1280 x 720 or 1920 x 1080 source down to 854 x 480.