RadCoverFlow applies some transformations on the displayed images in order to resize and skew them. I suppose this is the reason for the reduced image quality. In two words, RadCoverFlow calculates what transformation would be needed to display the image as if it was viewed from the specified angle and then applies the needed Silverlight transformations (usually Scale and Rotate).
You could mess around with ItemMaxWidth/Height properties and see if you could adjust the image quality.
the Telerik team
Check out Telerik Trainer
, the state of the art learning tool for Telerik products.