I had this issue, as well, and can’t find any newer posts (though there are two older posts), and (since OP never followed up to confirm the fix,) just wanted to confirm that is was an issue with FCP 7.
It has nothing to do with SD. I output an original 1440×1080 HD project (with text overlays) through compressor to three file sizes. The 1920×1080 was fine. The 1280×720 and 720×405 files both looked fine EXCEPT for any text overlay. The original video image was not squeezed, but the text was. Very odd.
I did not find a fix within compressor, but I’m writing to confirm (for anyone else who may have this issue in the future) that the exporting through QT may be the fix. For myself, I just used the 1920×1080 file, dragged that into compressor, and ran it through the other sizes, and it “fixed” the problem.
I’m still interested to try and troubleshoot why it’s doing it through Compressor, though. When I have some spare time next century. 😉