Why do my pics/footage look sharp in my iMovie window but when i export the quality of both turn to garbage? Help!!!

The nightmare that is my iMovie. I just proposed to my girlfriend last month and im trying to make a 7 minute movie about it in iMovie.
I shot my pics and video clips on my iPhone 4s. Unfortunately i forgot to turn HD on. Oh well, the footage looks great anyways. So i imported into iMovie and made my project.
In the iMovie window, the footage looks AMAZING and sharp. But when i export, i lose ALL QUALITY. It's unbearable. First i exported using quicktime and saved it to my desktop because i was having difficulty publishing directly to Youtube. When i watch my qucktime proposal clip, the quality is garbage.
Then i decided to buy the latest iMovie in hopes of it being something an update would resolve. Nope. However, now i was able to publish directly to Youtube. I did this and.....no improvement.
So then i got to thinking that maybe my project had a bug in it. So i slapped together a 40 second test movie. I used 3 of the same pictures and 1 video clip. Again, in the iMovie window it looks INCREDIBLE, but once it's exported it turns to rubbish.
It should be noted that when choosing my file size, the last 2 options which are HD were shaded off. I chose "Large" 720x540.
I did another test whereby I published my short 40 second test to Youtube but it allowed me to select the HD sizes. I did this. Result: still garbage resolution.
Im at my witts end. Are there any iMovie ninjas out there that know where im going wrong?
(someone suggested optimizing the video in iMovie. I tried and it tells me that my content cannot be optimized. So that's that.
Im depserate!

Please go to my website where I have posted new instructions on working with DV.
This keeps both interlaced fields from FireWire capture through to a DVD. All the lines means no lost quality when editing DV or Digital8.
It also solves the washed-out color problem.

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