I selected the highest quality pre-view and it use to work fine now I'm getting rough pixelated images in the preview window for no reason. If I choose display at project size its clear but to big of an image. What setting did I screw up ?
You should try to keep your video preview window set to 320x240
I notice that if I have this smaller I will get the same result that you mention. Of course if it is bigger it will play slower. check it out.