That looks perfectly normal to me Remember the textures are drawn for a 320x240 screen, not a resolution much much higher, so of course it's gonna pixelate

You could try using texture filtering (though I recommend against it, makes horrid halos around all the 2D backgrounds etc and is a slowdown too), or change the Hi-Res Textures to 2x-Sai of the 2x stretch, those do a much better job than normal texture filtering, but that too is a slowdown. I'd leave it as it is though, looks fine to me