I dont see how encoding at half-d1 would help much. All it means it that it would then be your DVD player doing the stretching it to fit on your TV instead of the computer.
If you play around with the VirtualDub filters enough you might just get some improvement. Its a typical case of rubbish in, rubbish out. So you can either put up with it or search for a higher quality version of the file (if one exists).