I would go with a 2.5" model... but, if you're really concerned about size, I have a different LCD in mind for you.
I would use this one. It's ~$25 more expensive, but it draws far less current, it's much smaller, and it's naked. I consider this to be a good thing, since I wouldn't use the original casing anyway. I would re-build the control board to suit my needs too. The only controls you would need to keep on that board are the pots for brightness, color and contrast. Everything else can be directly wired. Therefore, you could ditch the entire control board, and wire directly to the areas on the screen's driver board that the ribbon cable hooks up to. Since it only draws 90mA, you could just get a simple step-up regulator to give it the 12V it needs from the 7.4V Li-ions you
should use. (Does it seem too much like I'm trying to take over your project?

) Here's a comparison between the Lilliput screen and the AEI screen.
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AEI LIL
Width: 2.50" 3.35"
Height: 2.00" 2.45"
Depth: 0.45" 0.95"
Price: $85 $60
Horizontal Resolution: 480 480
Vertical Resolution: 234 234
Voltage: 12V 8V
Current: 90mA ~500mA
Oh, and standard definition TVs have a resolution of 640X480, but the NES actually has an output resolution of 256x224, so it technically gets distorted on TVs as well. Those LCDs have a higher resolution (both ways) than the NES, so text and such should be clear enough.
