PROBLEMS Reprojecting using cascading WMS

[Mark Howard]

I'm using terraserver in ArcMap as a background, but the service does not support NAD27 - epsg:4267. So there's a problem with data alignment as the service is WGS84.
I thought I'd create a map service and cascade /reproject to solve the problem -- i.e. specify in NAD27 the map file and WGS84 in the layer for the terraserver WMS service (see below)
BUT there are 2 problems:
1. The image does not seem to reproject - seems the same when I define the map file epsg as 4267 or 4326.
2. The image seems to get resampled down no matter if I specify PNG, JPEG or TIFF. Loses a lot of detail. 
Any ideas on fixing these issues??
 
THANKS!!

Mark
 
************************************  MAP FILE STUFF  *******************************
PROJECTION 
"init=epsg:4267"
END
 
LAYER 
NAME "terraserver" 
TYPE RASTER 
STATUS ON 
CONNECTIONTYPE WMS 
CONNECTION "http://terraservice.net/ogcmap.ashx?"
PROJECTION 
"init=epsg:4326" 
END 
METADATA 
"wms_srs" "EPSG:4326" 
"wms_title" "DOQ" 
"wms_name" "DOQ" 
"wms_server_version" "1.1.1" 
"wms_format" "image/png" 
END 
END