Originally Posted by Kirtai
I have finally tracked this down. The problem is that some Sony readers and ADE version 220.127.116.115 do not like 64 colour (4 bit) PNG images. If you do the conversion with 256 colours it works perfectly. A bit of experimentation shows that both greyscale and colour JPEGs display correctly too. I have added this as ticket #3529
Great find. After testing I can confirm that 64 color epubs look pixelated and 256 color epubs look just fine (on my reader, anyway). I've now set 256 colors as the default in the preferences.