Using MPEG-4 as the native iMovie editing format

Why does video quality degrade so horribly when using MPEG-4 as the native format instead of DV? When I import a video, it looks horribly grainy and pixelated. If I do the same thing with native DV type, it doesn't. I'm trying to avoid creating HUGE intermediate DV files when my final output format is going to be MPEG-4 anyway.
I found that if I convert my video to mpeg4 outside of iMovie (using Quicktime or whatever) and than manually place it in my media folder, then iTunes will use the high quality mpeg4 file and allow me to edit as normal, producing acceptable quality results. It just seems to be incapable of doing a high quality import. Technically my way works, but it is very much a hack to get around what seems like an arbitrary limitation of iMovie.
I hope I'm just missing something obvious. Can someone tell me a more straightforward way to do this?
Thanks.

any mpeg format (1,2,4, divx, h263, h264...) isn't meant for editing... it is a playback format, therefore it doesn't store every frame but just the differences..
importing mpeg4/mpeg2 has to be converted, iMHD does so into Apple Intermediate Codec... lots of computation... the computer has to "estimate" the content of every frame... another word is: lossy compression, lossy de-compression...
you can't keep the cake AND eat it.. edit video=investment, in soft- and hardware...
iMovie is meant to work with firewire-connected mini-dv camcorders

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