You guys are going to love this!!!
Ok so when I was building the Test products, I just upload the same photo to the Main Image and to the Thumbnail Image. Well X-Cart in all it's glory uses the Thumbnail image to populate the products tpl on categories with no products and on categories with products it uses a sized down version of the main image.
I had a good laugh when I realized what it was and resisted the urge to email x-cart a nasty gram.
SOLVED
REASON: STUPIDITY ON BOTH COUNTS.
CASE CLOSED
LMAO