As many have noted in the Market comments, the updates to GDE Home replacement has some issues regarding wallpaper resolution/quality. It appears (at least to me) that the update which allows for 5-screen live wallpapers (only on phones with a 2.1 ROM) re-sizes the selection area of the wallpaper creating a stretch effect if you are on a 2.0 ROM (most everyone on a droid).
What I did to get my high-res wallpaper back is back out of GDE and go into the normal/stock home and killed GDE in the settings/Applications/Manage applications. Then, set a new wall paper using the stock home, then went back to GDE.
For what it's worth, I have not experienced any FC or lag with these updates (or past versions) and am currently rooted running the Sholes 2.0.3 ROM with smoked glass theme and the espresso GDE theme.