it looks to me like they are resizing the actual thumbnal image , resulting in a blurry low res version, as this is happening they are using a movieclip loader to load a full res version of the larger image into a seperate movieclip inside the thumb. Another way to do this would be to load the full res larger image into a movieclip , convert it to bitmap data , draw, clear the intial movieclip, then on scale , run some sort of perlin noise or martix transformation to give the image the pixelated appearance. I would do it the first way though, maybe also using bitmap data with smoothing to true.