As a PSD file. It imports fine & is recognised as the right sized HD footage.
Others have pointed out I should have more ram involved so I’m upping it to at least 3GB asap & turning on disk caching. Multiprocessing & fast previews are off. It still hangs around for up to two minutes when it hits the 1st frame of the photoshop edited section before slowly moving on with the rest of the preview.
Hopefully the ram will change this, otherwise its all going to take a long time.