Apple Intermediate Codec is old, and really sucky. It's very lossy in terms of quality...not a good choice at all. use ProRes 422. If you have FCP 7...use ProRes LT. And a ProRes sequence...click yes to the sequence prompt like you have been.
I myself prefer to use Log and Transfer to deal with the footage. ClipWrap when L&T can't deal with it. Here's my workflow:
Tapeless Workflow for FCP 7 Tutorial
Shane
Little Frog Post
Read my blog,
Little Frog in High Def