Yeah, that seems to improve things a little - still needs some work though :
http://i18.tinypic.com/6uphxlw.gif
(I converted the outputted swf to gif just to give you an idea)
Some more info on DefineBitsLossless2 here:
http://www-lehre.inf.uos.de/~fbstark/diplom/docs/swf/Bitmap.htm