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How many is "normal" to drop?
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Video playback is very cpu intensive and will tax the Axim. Always clear the unit of background programs before playing. Switcher or similar programs will show which are open.
I've seen reports of PDA screens such as the Axim's limited to a max of 20fps. I've had excellent results with encodes at 15fps. Bitrates anywhere in the 200-300 will be your best bet. 250bps seem to be the "sweet spot", but your mileage may vary, depending on type of video and your preferences. I've experimented with a movie trailer, encoding at 150 to 400bps (in 50 bps steps) and the difference (on the Axim) in 250 and 350bps was indistinguishable to me.
Audio will be a factor in your final file size and performance. Mono takes less space than stereo.
I would strongly encourage trying out short clips (<5 min) at different settings to see what makes your eyes/ears happy. I like to take the movie's trailer from a DVD to experiment with. Plus they make great short examples to impress your friends and co-workers.
The Pocket MVP help file has excellent tips, hints and explainations on the how and why of encoding at these rates.
hope this helps,
Jeff