Encoding from MPEG1 to MPEG2 will never gain you any quality. Doing that is absolute insane :).
For encoding MPEG 1 or 2 format, the best encoder around is Cinema Craft Encoder. This one delivers good picture quality and good speed. The only problem is the price: the cheap version (CCE) costs about $250 (that may be affordable). The expensive version (CCE sp) however, costs $2000.
If you want to do cheap, but fairly good encoding, go for TMPGEnc. This program encodes with a little less quality, and way slower, but for the price, this really is value for money.
A free version can be downloaded from loads of locations. Visit www.doom9.net for some of those locations ;)…