MPEG-1 to WMV without losing quality while compressing size?

[duckboy2k]

I have a few movies in MPEG-1 format, I want to convert it to WMV format, to save as much space as possible without sacrificing the video quality.
I did a test run with ProCoder 2 and was very unhappy with the result, with the highest setting for video quality selected, I was able to trim the file size by 20% (rough estimate), but I was not pleased with the quality.
The original source is vcd, so there are some pixelation, but the video was sharp, WMV was blurry. Here are my settings for ProCoder2:
Video Codec: WMV8 and WMV9
Frame Rate: 15
Bitrate mode: Quality Based VBR
VBR Quality: 100
Audio: 96kbps CBR, 2 passes.

Test File:
Original MPG (7.4MB)
After WMV *using the above settings* (5.8MB)
As I mentioned above, the quality loss of the video was very noticable. My goal is to save as much space as possible WITHOUT the loss of video quality.
Is it possible? or should I just keep the original source in .MPEG-1 format?
If yes, which program would you recommend and what settings?
Thanks in advance

[offline]

IMO keep the mpeg1. Converting an already compressed
video to a more compressed format is almost
always going to look worse.

[jimmalenko]

Try Windows Movie Maker and the high quality video (small) template.