What is the quality of the original file?

If the original is already compressed to 1024 then when you recompress it will only get worse.

VBR (twopass) is definitely the way to go and if it is larger in size like 720x576 then encode it out to 320x240 and the loss will not be quite so obvious and the smaller size is exceptable for web use.

Another option is to use file splitting software that will discard the bits you don't want and just rewrite the header. There are loads to choose from and most are not so expensive either, just Google it.

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Edius Pro, ADVC300