Snapz Pro to Final Cut to Flash Video - Resolution Problems

For my student job I'm supposed to make web video and I have a guidebook that explains how to do it. However, I have found some problems that have screwed up some things.
So I have captured video from Snapz Pro and I did this by setting the display resolution at 800x600 so that text can be readable. Now I set my selection capture at the same setting so that my final .mov file is 800x600 with good readable text.
The issue is when I get into FCP HD 4.5!
My final output is 480x320 MPEG-4 for flash video.
My guidebook tells me to set the sequence setting to 480x320, square pixels and MPEG-4 Video.
The problem is that when I bring in the 800x600 .mov file, I have pixelation problems and the video quality is markedly decreased.
I haven't been able to figure out the best approach but I need to change something for sure.
Any tips or ideas?

You in the same class with Timothy Mosbach by any chance?
Anyway, Timothy and I went through this exact issue in this thread:
http://discussions.apple.com/message.jspa?messageID=3493859#3493859

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