Jagged text in Photoshop CS5

Hi
I have my text set to anti alias and on smooth, but when I past an image into my text to create an effect, the edges become jagged.
How can I fix this?

I just wonder if that is really the way  to do it, but I know next to nothing about building websites.  Is it not possible to overlay text on top of the graphic rather than rasterizing it and placing it as an image file? I'd be inclined to go ask about it on somewhere like the Dreamweaver forum.
http://forums.adobe.com/community/dreamweaver

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