I shoot all of my projects with a 7D, convert the files to ProRes 422 (HQ), edit and then export as 1920x1080 ProRes 422. Always looks great. However, if I attempt to export in any other combination of size and codec in the hopes of having a smaller file size, the image becomes completely pixelated. I realize there will always be some loss in converting to a smaller file, but my results are unwatchable. What am I missing? Shouldn't I be able to export from FCP 7 a variety of files sizes and varying levels of quality?
FC is not the best application in the world when downscaling, but normally you can get decent results. Even using QT Conversion you shouldn't get something so awful.
If you have a master exported in Prores, you can use Compressor.
Set the "Frame Control ON", and Better downscaling.