Camcorder question/issue

I have a sony TRV-140 camcorder, and the video on the camera looks great after recording, but the quality seems to go down when I capture it while playing with windows movie maker, with both DV and USB. (I even turned off the preview on windows movie maker and it's the same quality but more FPS)

There are so many video settings, it would take me hours to go through each one, so I have 2 questions:

1) Does it matter what setting I put windows movie maker on or will the video have less quality then the camera because it is being transfered/converted?

2) If not, what setting should I use?

Also, if there is a better section of the forum to ask this in, please let me know, thanks.