[mark thompson] “on your project properties you have a de-interlace mode set for progressive footage. I don’t think you need that and it may be doing some harm, i.e. contributing to the jagged lines. Set it to where it should be for progressive footage, i.e. none.”
Tried this, did not fix the issue.
[John Rofrano] “Was that image taken from DVD Player software of just Windows Media Player because WMP might not be smart enough to deinterlace the footage.”
It was taken from VLC media player. I could manually turn on the de-interlace feature during playback in VLC, but that makes motion blurry, which is not what I want for this project. The reason the de-interlace lines look so big is because I cropped the screen-grab to emphasize what you should be looking at.
[John Rofrano] “Right-click on one of the clips on the timeline and select Properties and go to the Media tab and post a screen shot of the media properties. I’d like to see how Vegas Pro is interpreting your footage.”
Here you are:

[mark thompson] “If you want to post a short clip somewhere it will be easier for others to help resolve the problem.”
If I render it out normally it will look fine, it’s only when it renders in DVD format that it looks this way.