Why are my images being pixelated when using free transform?

HI.
I am pretty comfortbale with PS but stil learning more of the finer details.  I can't find an answer for this on any help topics or threads.
I often bring several images into a document or workflow and it seems that when I reduce an image that's too big for the canvas, it looses it's quality as soon as I break out the transform tool and becomes very pixelated.  Any thoughts?
Thanks very much

Thanks for both of your suggestions.  My images are at 100ppi resolution and I am viewing the documents at about 150% the entire time.  My image interpolation is set for bicubit (best for smooth gradient).
I've tried to reproduce the problem in different ways before replying here and think I've narrowed it down a bit.  It seems that when I use the File->Place way to insert an image into an existing document, I don't run into this pixelation or image degredation issue.  It's only when I drag an image from one document to another using tabbed document introduced in CS4 (I'm using CS5 btw).
If I have document 1 open and drag an image (or layer) from document 2 into document 1, then resize that image in document 1, I get a loss of quality.  Not sure if that helps anyone else.  Also not sure why this is hapenning as the ability to drag layers back and forth is pretty handy and I'd rather not give it up.

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