"For a test, add an image as the background and add one movie or image to the menu. Burn (encode) the test project to an image file (ISO). Don't forget to name it and select as easy place to have it made. Download the free VLC player (Cnet.com) and play that ISO file. You will see that it is the same resolution as the movie. 720 by 480."
I did that, and the image appears to be better--I used Zune HD (720p) as my output choice for the menu and movie file. Perhaps if I upgrade the output to a 1080p file it will work OK.
Thanks for the suggestions. As an aside I was able to play the file by creating an emulated disk (Tools, Load disc Image), selecting the .iso file, then in Windows Media Center(WMC) selecting DVD under Movies Menu. Also it worked when I went through Windows Explorer and copied back the VIDEO_TS files off the emulated drive to a folder I'd added in WMC.