When you select a photo from the selection at the bottom of the album it is displayed in the upper section. All the photo's are forced into the size required to fit this space. If the picture is smaller than this space then it will look pixilated when it is displayed.

However the upper section is purely to help you select the image you want to view. Once you have the correct picture in the upper display, then once you click onto the upper display, the image is then shown in a new window at it correct size and shape.