You dont need to re-encode it, otherwise quality will go down further. Bit fiddly to fix though
Convert the *.DAT file on the CD to a MPG file (use VCDGear from w*w.vcdgear.com ) Then use TMPGEnc (w*w.tmpgenc.net ) to De-Multiplex the mpg file. What that does is split the Video and Audio out as separate files.
In Tmpgenc, hit New Project to clear all settings, load the MP2 file into Audio source (make sure Stream type is Audio only) then in Settings, change Bitrate from 192 to 224. Hit the Setting button, then Normalize, enter 100 then OK and wait a min or so while it checks through the file. Then OK out. Hit Encode and shortly you will have a Normalized audio file.
Re-multiplex the Video file (the M1V file) with the new MP2 file and burn to CD as a VCD with Nero. Phew !