I'm not sure exactly what the problem is with the quality, but it could be the quality is not set to 'Best'. There is a little drop down box at the top of the preview window, so make sure that says best.

It's easy enough to resize the pic in Photoshop/Paint Shop pro. You will obviously know the original resolution of your source video (e.g PAL is 720x576) so just resize it to that and it will be the correct aspect ratio.