I can hit alt+o to set the settings, but the game refuses to recognize the changes, hence no stick and pixelated video. I am running windows 10 with a logitech extreme 3d pro stick.

I keep reading about the dvd quality screens but have yet to see any that do not look like an old tv from the 70s.

Dos or Windows version?

it is the windows version.

Is it installed outside Program Files?

I don't have windows 10 but shouldn't there be something to set game peripeheal priority in the control panel?
The joystick you have should pose no problem since the game uses directX to recognize the stick, I played the game with a full HOTAS recently.

I played the GOG version on 7 64 bit and had almost no problem (just the cutscenes audio was really low, because the windows AC3 filter defaults to a very low volume for some reason and had to install a utility to amplify it).

The DVD version cutscenes are default, there is no way to change them, are you sure you don't have some codec interfering?
While they are not quite full DVD quality (still had to fit the game and a lot of footage ina single DVD at the time) I don't remember them being pixelated, they were incredibly nicer looking compared to the CD cutscenes of Wing Commander 3.

The problem with the joystick turned out to be the usb port. It was plugged into the 3.0 port. When I switched it to the 2.0 port it worked fine. Not sure why but the video cutscenes look really good now. The video says running in svga mode now. Did not know that the usb port mattered much, but now I know what to look for.