I've ruled out a couple things - it has nothing to do with connection - RCA, HDMI, Component...recreated issue with all 3.
Has nothing to do with player - created issue with multiple players.
The issue is with 16x9 vs 4x3 mixed with a specific background.
First thing I did was put same overlay's over black. Looked perfect. No problems.
Second thing I did was put them over a still image OR motion menu (transcoded MPEG2) - problem on both. It seems to be this background...whether motion or still creates a banding in the overlays (whether they are simple boxes or complex shapes, it doesn't seem to matter)
Third thing I found was that problem went away when I changed menu (in encore) to native 4x3 OR changed DVD player to push out 16x9 image.
Final thing I did was to put all 3 overlay assignments in my photoshop file - =1, =2. and =3. And...get this - 1 and 2 had the problem...but 3 did not.
So my result was to use ALL =3 and use the same color I've been using all along...WORKS FINE on DVD player set to 4x3 LB or 16x9.
The overlay in the following image is the 3 circles together...on the left side of the screen, about middle.