It can still be lossless at 320x240. NTSC is only 352x240 anyway. The problem is that you're applying two lossless video codecs to the stream, one on top of the other. To compare with stuff we should all be familiar with, it's as if you ripped a song off of a CD, converted it to MP3 format, decided that you needed it at a different bit-rate, and generated a new MP3 using the original MP3 as the source instead of going back to the CD or the initially ripped WAV.

I don't know about your capture utility, but there should be somewhere for you to select what codec is being used (there might not be, but there ought to be). Look through there and see if you can record as a lossless AVI (still at 352x240, or whatever's the closest you can get). This will take up massive amounts of space, but when you convert it to MPEG, you'll have only lost data once instead of twice.