VideoStudio :: Graphic Image Pixelates In X4

I recently added another edit system and installed X4. I have been creating a slide show to music and all seems fine until addimg a graphic (Jpeg logo) to the overlay track. I then reduce the size to place it in the lower 1/3. When paused, the preview window shows the graphic as sharp. When playing I can see resolution loss. I doubled the size of the graphic but I still see the resolution drop. It doesn't matter if the graphic is at its original size or smaller when adjusting it in the overlay track. When I output as an MPEG the background video is fine, but the overalay graphic is horrendously pixelated. See attached screen cap.

I played witht he render settings moving quality fromm 70 to 100 and upping the bit rate to the max. For grins I turned off non square pixel rendering, but it made no difference in the poor graphic resolution. I tried exporting as a wmv (hd 720 30f) and the problem was gone. Unfortunately, my end user client ( a programming server) requires MPEG-2 files.