So you were editing 640×480 clips in a HD sized 1280×720 H.264 timeline, and now you’ve changed your sequence settings and things are blurry in the canvas.
How could they not be blurry?
#1 – The canvas is for preview only – it is not representative of your video.
#2 – H.264 is not an editing format.
#3 – the DV framesize is 720×480.
#4 – moving clips from an HD sequence to a SD sequence can cause all sorts of scaling and aspect problems.
etc, etc, etc
Keep it simple – Use the DV easy setup, acquire your footage with that easy setup, edit in that easy setup, and finish in that easy setup.