Have you tried H.264 at 1Mbps or 700-900kbps? I don't do as much as encoding now as I did previously, but for DVD transcodes I was getting fairly transparent encodes with XviD and some custom quantisation matrixes from Doom9 at about 1200-1400kbps with the original AC-3 audio. At 2Mbps, XviD should produce excellent results and I would of thought the significantly more computationally complex and efficient H.264 codec would cope with much less bitrate, unless that particular implementation isn't that optimised.