We recommend you to update the Slingbox Classic firmware version. The following link will allow you to get the step-by-step instructions in order to update the Slingbox firmware version.
I have a similar issue with my slingbox classic ever since upgrading my desktop & laptop to Windows 7. My slingbox picture appears more pixalated. When I connect to other friends slingboxes which arent classic the picture is good. I think the issue is Windows 7 with the slingbox classic. I'm also running the latest firmware on my slingbox 1.2.4. Also makes no difference if I view via the browser. Connected via S-Video cable if that makes any difference. Interested in any advice to fix. Thanks.