You're right that your problem is the way your compressing stuff. You only want to compress anything once if at all possible, compressing it twice leads to artifacts and a general mess. Also compressing something twice won't make a difference [noticeably so] in the final video file size. So if you're rendering out compressed jpegs for your image sequence then compressing those again for video, its not likely to turn out as well as it could, even if you're using some highend app like AE, Vegas, Avid, or whatever. It won't make a different what program you use if you're still compressing a cpl times. Typically you want to take the highest quality images you can take as far as you can take them in the process, i.e. keeping uncompressed images up until the very final render if possible, but this isn't always possible in the home/hobbyist enviroment.
Personally when I render anything that isn't just a test or will take mroe than a cpl hours, I render it to frames. Usually I use 32 bit PNG files. They give you a nice image quality, without taking up endless amounts of space, and since its 32 bit, its got an embedded alpha. Tho if you don't need the alpha for compositing then you can just render as a 24 bit PNG. My image size for animations is 800x450 usually, and rendered out as 32 bit PNG's don't exceed 500k. Usually they're in the 300k range per image, which isn't bad at all.
Additionally, unless you're gonna be adding sound, you can compile your images in LW itself, no need to mess with Premiere or anything. Load up a blank scene, and in your image editor, you just load an image like you normally would, select the first image of your rendered sequence. On the source tab you'll notice it says "Image type" and there's a dropdown next to it. Select "image sequence" from the drop down. Press "ctrl + F7" to bring up your compositing options and set your image sequence as the background image. Change your camera settings to the correct size [w/e you rendered out the image sequence at]. Set up your saving options like you would if you were rendering out your animation b4, compression/MPEG options, and what not. Press F10 and you're off, should string that image seqeunce together in not times, ticks them off at like a frame every tenth of a second or something. Make sure you have "frame end beep" disabled tho...or you're in for a real treat.
Lastly there are freeware alternatives for adding sound/compiling animations. Jahshaka is supposed to be really nice, tho I've not used it. Umm., sorry..I think I just rambled for a bit here, hopefully it helps some tho.
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