Mark,
I think Matrox has a pretty good reputation when it comes to video editing but I think the G400 is too much ($650)?? It's an old card here in Canada and it shouldn't cost more than $250 Canadian. The new one is G450 and I don't think it costs more than $300 either. You can also look into ATI All In Wonder Radeon.
A standard NTSC VCD with Audio birate = 224 and Video birate = 1150 can hold a 1:14:15 long movie. You can of course divide your 3-hour long movie into different sections and burn them to 3 different CDR.
As far as pixellation and the contrast is concern, it's hard to tell with the information you have. What software do you use to encode the clip from AVI to MPEG1? It plays a great role here if it doesn't have good quality (bad quality = more pixellated). For contrast, is there anything you can control via the capture card software?
If you need more help, check out:
www.vcdhelp.com