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Need help with converting home movies

I've been tasked with making DVDs and/or a video file of an old VHS cassette, itself which is a collection of silent 8mm home movies.

So far, I've got a DVD made from the VHS. It came to 3.11gb's worth of VOB files so I can just copy that out to anyone who needs it.

The harder part I'm struggling with is making a file. The source is 720x480 @ 30fps - 56minutes long, and I've seen dvd rips of 90 minute movies that compressed nicely into ~700mb files. I've been messing around with HandBrake and the result I get from it for ~700mb is blocky heavily compressed. I made an h264 version that came out pretty good, but it was 1.81gb, which is still quite large. I'm going to be trying some other software today: Freemake, and Arcsoft's media converter.

What I'm asking is am I doing something wrong? Am I using subpar software or settings? My source material isn't very sharp or anything but when the output looks like a really bad jpg, it feels like something's not right.

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