Why would my SD export be better quality when editing with SD instead of HD?

My footage is in HD 24p. I have found that if It set my sequence to DV 24, when I export to MPEG 2 I get a good quality video. However, when I edit the same footage using a HD sequence and export to MPG2, the file size is about the same, but the video is slighty blury. Any ideas why? I would think the quality would be better edting in HD instead of SD, when exporting to SD or MPG 2?

I filmed it in SD on my Sony HDV-AU1 camera. What is killing me is if I choose upper then the footage looks fine, but then what I have done is add some jpeg images that I created in photoshop on a PC. they are simple images of text that say "Round 1" or "Round 2" in between the fights. I have them spin into view using one of the transitions in FCP, but when I get it to dvd, they look horrible, echoy, just like the footage looked like before I changed it to upper field. So as it looks now, I can't have both look good i guess. This doesn't make sense to me!! It is incredibly frustrating especially since I'm out of money and almost out of time on this project (it has to be done by next week). I keep re-doing the project, re-building it, re-setting it in one type of sequence after another and it's not looking good at all. what am I doing wrong?

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