First of all, the Hauppauge can't record at 1080p. It can do 1080i, which would display a blended/blurry/interlaced image every other frame.
Second of all, TTT2 and many other fighters are native resolution of 1280x720p. The Xbox 360 scales up the image to whatever resolution you want but you're just increasing the data size and can get frame hitching to occur as the system attempts to upscale the native image it's receiving. The resolution is proven as the PlayStation 3 does not upscale resolutions and will force the resolution to change to 720p should you have its dashboard set to a higher resolution of 1080i/1080p.
That might help explain the blurriness you may be seeing, keep in mind that the Hauppauge doesn't record lossless video. It compresses the video internally on the device befor passing it through to the PC for storing. So you will have some compression at best to the recorded video and the level of blurriness can be decided upong based on the captured footage.
The blurriness you're seeing on the rendered video is most likely due to the second pass of compression your video creation program is performing when creating the new video. If your frame cuts for the inserted clips are off, since you recorded at 1080i, then the interlaced frames will be captured for YouTube. YouTube plays back at 30fps, regardless of the source video being at 60fps. So if one of your combo video clips is inserted and placed off one frame then you'd basically be viewing all of the interlaced frames from the 1080i captures instead of the progressive frames before and after the interlaced frames.
