I spent some time getting some high-resolution DVD Coverart (700x1000) for display through XLobby. My TV is a 1080p LCD TV, and I have the image object in my XLobby skin sized to exactly 700x1000 as well (so it shouldn't be doing any resizing).
However, the images look awful in XLobby, blocky, pixelated, and loss of detail. In fact, lower-res images tend to look better! I know Xlobby caches images, but is it also down-res'ing them? What is the largest image resolution that XLobby brings in without altering it?