If you have "hi-speed" dialup, what it does is compress or pixelize pictures so they download faster.
They will be a place to set the amount of compression from "no compression" for regulare speed and good pics to "full compression" fast loading pages with pixelated pics.
This is most likely your situation.
I am running Windows XP. Something how changed to cause pictures on MSN(example) to be pixilized? How can this be fixed? Maybe it is not a Windows problem. I just don't know.