More clarification for what I was trying to explain earlier
Quote Originally Posted by musclenerd
@shadowtrainer02 sometimes lzss "compression" turns out larger than the original PNG .. what was the size difference?
http://twitter.com/MuscleNerd/status/8143894636]

Also

Quote Originally Posted by planetbeing
Dunno why people just make up stuff. Here's what it actually does:

The native format used on the iPod is a special bitmap format compressed with lzss and embedded into the Img3 container. No, it doesn't natively use PNGs or JPEGs or anything your computer works with so EVERY IMAGE MUST BE CONVERTED. The size limit of the image AFTER CONVERSION is currently 200,000 bytes (about 195 KB).

Since the compression algorithm is different (and not as good) as those used for PNG and JPEG, it's impossible to have a hard and fast rule that says PNGs under this size will be allowed, or JPEGs under this size will be allowed.

However, generally JPEGs have good compression ratios (since it's lossy) so a 64 KB JPEG can end up being a 500 KB img3.

Really complex pictures, like photos, compress really poorly, and since most JPEGs are photos, that's why they screw up more.

And no, LogoMe doesn't stick a transparent pixel somewhere if you don't have transparency already. That trick is just a ghetto hack used by users to force their image software to add a alpha channel into PNGs. LogoMe just assumes 0% transparency for all pixels if there is no alpha channel. Easy.
LogoMe + Me = WTF - Page 2 - iPod touch Fans forum