Good playing!
The picture quality is very webcam-ish indeed.... I don't know if any web cameras like that will give good quality video. I've seen very good video from the
Apple iSight but I don't think you can use it unless you use a Mac (which I assume you don't, seeing that your video clip is .wmv).
However, assuming that you do have a decent video camera, it is important to have
good lighting. Neither camera nor editing can remedy bad lighting.
As for web video formats.... I've used mpeg4 compression quite a bit - it seemed to give best quality compared to file size. Recently I've started using the
h.264 codec which is utterly amazing - even better than mpeg4 IMO. And from now on I'll be using the
iPod h.264 video standard - makes for easy organizing in iTunes and iPod compatability. And it looks, and sounds, very good.