Hi end80!
Try it using FitCD. It will take care of the resize and the black bars needed to preserve the widescreen and the correct aspect ratio. FitCD will output an AVS script that is 352x480 (select 1/2DVD as destination resolution), that is the exact resolution of the template you want to use. Then in TMPGEnc set the source aspect ratio to 3:3 display, and the video arrange method to full screen.
Note: Don’t pay attention to the top of FitCD, you will only use the “mpeg resize” and the “avs script” area.
You can find FitCD here:
http://www.kvcd.net/forum/viewtopic.php?t=1369