No upscaling is needed anyway. 352x240 is a valid DVD resolution, and my limited tests didn't really show much of a difference on a 1024x768 display between having it at 352x240 or at 720x480. The former is a bit softer*, but otherwise not too different. Blowing it up to 720x480 will just inflate the filesize because the encoder will throw more bitrate at it that could be saved keeping it at the closest compliant resolution to the source.
As for the filtering, the only thing it *might* need - and maybe not even then - is some light smoothing to try and counteract the compression artifacts that DivX 3.11 introduced (see the relevant section of the
AVTech -
use only one of those filters, based on what you see is appropriate). Then you just have to make sure that you use a decent bitrate and high enough precision in your MPEG-2 encoder (HCenc 0.25 in my case) to not reintroduce it. At 352x240, 2000kbps is quite generous as it is, but you could go to 3000 or 4000 - HCenc's rate control is good enough that it'll know where it needs it and where it doesn't.
*depends on the resizer; being 'a bit softer' is the case if you still use Spline36Resize on it. Normally I don't bother with using sharper resizers on content that small - if you use BilinearResize it'll be even softer, which might help to mask some of the blocking in the flat areas, although at the cost of making lines blurrier.