The size in pixel's isn't the issue, it is the image size in KB that matters. For full color images, the average size of a 64 KB GIF is about 200x300 - but this size is highly variable and some 600x800 GIFs will fit in 64 KB. By default, the mobigen.exe program reduces the size of GIF images so the they fit in 64 KB by shrinking the image. If you use mobigen.exe -jpeg (and JPEG images), it reduces the size in bytes of the image by reducing its quality while maintaining its size in pixels. Since JPEGs are intrinsically more efficient than GIFs for many images, the 64 KB limit is less onerous for JPEGs.
I have screenshots showing the difference between LIT (unlimited size JPEGs) and PRC (limited byte size GIF/BMP) at the start of
Images in MobiPocket. If you use mobigen.exe -jpeg on the LIT file you get essentially the same result as the original, and if you use mobigen.exe (without the -jpeg) on the LIT file I expect you would get essentially the same result as Baen's original PRC (very small images).