Great, I would take an MKV over a DVD any day!!! But the resolution is the same problem I was facing with my ROTJ reconstruction MKV. You have a few choices:

1) Leave everything as it is for the DVD (720x480 with the black bars) -

Advantages: It should scale properly to 16:9 and it will be full anamorphic resolution

Disadvantages: The black bars will eat up bitrate.

2) Cut the black bars and leave the resolution as is (720x366 no black bars)

Adv.: Full anamorphic resolution of the actual picture area and no black bars.

Dis.: Probable problems with playback and scaling.

3) Cut the black bars and resize to 2.35:1 by down-rezing (720x306 no black bars) -

Adv.: No black bars and probably no problems with playback and scaling

Dis.: Non-anamorphic resolution of the actual picture area

4) Cut the black bars and resize to 2.35:1 by up-rezing (854x366 no black bars)

Adv.: No black bars and no problems with scaling. Full detail of the original anamorphic picture.

Dis.: Possible problems with playback + the added resolution will eat up bitrate without really adding picture information.

5) Cut the black bars and uprez to 720p (1280x544 no black bars)

Adv.: No black bars and no problems with playback and scaling. Full detail of the original anamorphic picture.

Dis.: The added resolution will eat up even more bitrate without really adding picture information.

There you have it, none of them is perfect - take a pick. I went with 1 because I wanted to keep all detail and leaving the black bars should eat up considerably less bitrate than adding resolution to the actual picture area.