MPEG-1 to XVID with virtualdub, recommend settings?

[duckboy2k]

Can someone recommend the best and most effective method for converting MPEG-1 (1150kbs) files to Xvid (1.1 beta 2), using virtualdub?
My goal is to reduce the size while mantaining as much quality as possible.
I've spent the last few days tinkering with virtualdub with very dissatisfactory results

MPEG-1 file info
1150KBS video bitrate
224 CBR audio
aspect ratio: 352x240

Using Virtualdub
Compressed with Xvid 1.1 Beta 2
Filter:
Aspect ratio: 320x240
Precise Bilinear
Compression:
2-Pass
AS-5
Quantization type: MPEG-Custom (eqm_v3lr.xcm custom matrix)
Adaptive Quantization: NO
Interlaced: NO
QPEL: NO
Global Motion: NO
BVOPS:
Max: 2
Quantizer Ratio: 1.50
Quantizer offest: 1.00
Packet Bitstream: NO
Motion Search: 6-Ultra High
VHQ: 1 - Mode decision
Use VHQ for Bframe: NO
Use Chroma motion: YES
Turbo: Yes
All Quantizer are set to 2-31
Audio: Lame MP3 128Kbits
Target size: 300MB

My original mpeg-1 file is 480MB (47 mins), after converting it was reduced to 210MB. As you can see the final output file size is alot smaller than what I specified. I was not sastified with the video quality at all.
There are alot of noise around the edges and the color isn't as bright as the original source.
I tried switching the custom matrix to "eqm_v3ehr.xcm (High Bitrate)", same spefication as above. This time the final output size was 330MB. The quality difference was minimal compared to the (210MB) file, not worth the 120MB difference.
I also tried using the default Quantization type: H.263, again i wasn't happy with the result.

What settings/filters would you recommend for converting MPEG-1 file to XVID? Are there any filter that would help me reduce the blockiness/noise (very minimal) of mpg1 files?
I would like to maintain as much quality as possible while reducing the file size by 40-50%.

[jimmalenko]

I would use AutoGK, which is a front end for virtualdubmod and AVISynth. Perhaps try extracting a 1 minute section to use for testing using TMPGEnc's MPEG Tools > Merge and Cut, then setting the "Target Quality" percentage to 80, and seeing if that gives you satisfactory results on your test encode. If not, repeat the test with a % of 90, and so on .....

[duckboy2k]

Thanks for the suggestion. Will third party filter for Virtualdub work with AutoGK? That's one main reason why i'd rather work with Virtualdub, because there's alot i want to add to the video after i encode it.