It is using compression for the transmission. For example when playing 1st person games and you pan around a room, you can see the screen version is absolutely sharp and clear, but the TV version shows obvious signs of compression. After the image becomes static, the resolution improves.
I have not experienced any real issues with massive buffering, or lag. However there is a persistent lag of about 0.2 of a second which could affect some games players.
I also have the issue where if you play music, and then hit home, the music stops a couple of seconds later. You are supposed to be able to play music and videos on the TV, while using the phone for other things. I cannot get that to work.