I've only used Prism once, to convert some big divx videos to windows media. There are some changable settings for windows media to adjust the quality, I think it defaulted to streaming for dialup, which is the lowest quality. Video conversion takes a lot of memory, so the conversion process can be affected by other programs running too. I generally close all other programs and let it run until it's finished. Sometimes it will seem like it's hung, when it's actually just working intensively.
I've downloaded your mpg, I'll see what it does for me.