The resolution of the video and image may be different. Assuming default settings, Video Edit Magic creates a project with dimension same as the first file added to the timeline. Therefore, if you add an image with higher dimension to the timeline after adding a video with a lower dimension then the image quality is likely to be poor.

To create projects with the same dimension as your image file, add the image file first to the timeline or change the default video setting while creating a new project. You will have to set the Stretch Mode of the video to maintain the aspect ratio and to center it.

You can also make movie in uncompressed AVI to maintain the original image's quality. However, doing so results in AVI files that are large in size.