haha - no I'm not MrSaftey, i just found the video a while back.
It should work just as you did it. I also change it to 1mbps where you have doen so as am also using Ver7.
The only thing i can say is that if you are taking footage off of your camera then this is probably why its looking bad. Your camera uses a super compressed format, so its never gonna look good. When you compress that again it will look worse.
I use proper video cameras in most of my stuff.
Here is a link to a video i did where the video footage is from a digital Camera:
http://www.youtube.com/watch?v=G4a4U4sj2ZA
You can see that the video is really poor quality because it came from the camera like that. The photos are of a much higher resolution which is why they look much better.
BAsically there is a nice lil phrase i'd like to coin here - "You cant polish a turd"
If you footage is poor to start with you cant make it look any better.