You can tap on the cover artwork to enlarge it to the main screen (single tap) or to full screen (with a double tap):
The artwork is synced to the iPhone / iPod Touch with only 320x320 pixels. Artwork which is not quadratic is made to fit within 320x320 pixels, adding black bands (which SmartPlaylists cuts off) - so it can look blurry when enlarging it.
UPDATE: With iOS 5 the cover artwork is synced to the device in full size. With SmartPlaylist v5.4 you can also use the pinch gesture to enlarge the artwork.