Ugly & Low Quality Crossfades After Media Encoder

When I render with Adobe Media Encoder in Premiere Pro CS3 I get a good quality m2v except for the crossfades, dissolves, and fades.  They look like a low quality youtube video or compressed JPEG image!
Here are my render settings:
MPEG-2 DVD
Noise reduction: OFF
Codec: MainConcept MPEG Video
Quality: 5
TV Standard: NTSC
Width: 720
Height: 480
Frame rate: 29.97 DF
Field order: Progressive
Pixel aspect ratio:  Widescreen 16x9
Bitrate:  VBR, 2 pass
Min Bitrate: 1.5
Target Bitrate: 4
Max Bitrate: 7
GOP settings: M frames 3, N Frames 15
Audio: PCM, 16bit, 48kHz
Multiplexer: OFF

CBR is not better than VBR 2-pass, all the rest being equal, on the contrary, VBR 2-pass is better but takes double the time.
There are two problems I see here:
1. Progressive. Is the source material really from a progressive SD camera or was it converted to progressive? In the latter case, the OP has willingly thrown out half of the vertical resolution, which can cause the degraded quality.
2. The bitrate is pretty low. Using a calculator to do some bit budgettting can help improve quality. Look here: http://dvd-hq.info/bitrate_calculator.php?PHPSESSID=6501b6b2b31f4c4a295bc8c2ba1e6f57#Calcu lator

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