I've found that when holding a clip at any point, the quality of the frame that it is held on is drastically reduced. Exporting a single frame and holding it appears to be a workaround however this is extremely tedious when many of these have to be added. Frame hold worked fine in CS2. Is there any way to fix this problem without having to revert to CS2 or use the workaround that I mentioned??
Frame Hold in CS3 is hosed. That's all there is to it. It has to do with whether clips are interpreted as interlaced or progressive, I believe, but it does not matter because there is no way to override its assumption. Stick to your export frame method.