Two reason why this could be happening.
1 - It could be in your source footage - not much you can do without filtering the hell out of it and possibly trading blocks for blurriness.
2 - The more likely culprit, too low of a bitrate for the video. If you are using WMM's preset video settings, the best option is to save the video as
DV-AVI (NTSC) and use VirtualDub/Mod to compress it with XviD and MP3 codecs. It also gives you the option of post-processing your video with AviSynth to improve the quality and compressability.
If your video is already very clean, high quality footage, then you may want to try using the
Video for local playback (2.1 Mbps) setting, or the
High quality video (large) setting.
Personally, I'd suggest doing the DV-AVI > AviSynth > VirtualDubMod > XviD/MP3 AVI route. Properly configured XviD produces a better quality video (albeit at possibly slightly bigger filesizes) than even the best WMM preset. Now, if you use Microsoft's newer codecs, you could get equivalent quality to the XviD, but it is more work than just using the built-in presets of WMM.
Resources:
http://amv.dwp.filetap.com/wmm.htm
http://www.animemusicvideos.org/guides/ ... xport.html
http://www.animemusicvideos.org/guides/ ... intro.html