The problem notably affects photos received as email attachments. When viewed in Mail, the attached image appears fine. However, if you select to Save Image and then view the image in the Photos app, the photo appears blurred or fuzzy.
On this Apple Discussions thread, more than half a dozen people have complained about these blurred photos. Other web pages also feature reports of the same symptom and have posted the blurry photos to prove their point.
This seems like a simple case of a bug in the iPhone software. What makes it less simple, however, is that it can be hard to reproduce the bug. Initially, we tried several times, starting with photos in our iPhoto library, and could never duplicate the symptom. We even resized photos, to conform to dimensions that supposedly trip the bug. Still no problem. The Apple Discussions includes several posts from people who similarly have never seen this symptom.
See also: Apple iPhone 3G review
There was one way we were finally able to wind up with a blurry photo: start with a photo taken by the iPhone's own camera (which is a 1,200-by-1,600 pixel image), send that to ourselves via email and then save the emailed image back to our Camera Roll. The resulting photo (which is now a 600x800 pixel image) is blurry when viewed in the Photos app. Oddly (as others have also reported), if we import the blurry photo directly to our Mac, by connecting the iPhone and using Image Capture, the photo is not blurry on the Mac.
In other words, the problem is with how an image displays in the iPhone's Photo app, not with the image itself. Further, the problem seems limited to certain resolutions (600-by-800 being one of them), but not others. It remains unclear (at least to us) exactly why only certain resolutions are affected - although it appears to be related to how the images are scaled to fill the iPhone screen. What is clear is that this will be an annoying problem for anyone that attempts to email an iPhone photo to another iPhone user.
So far, there isn't any work-around to avoid the bug. We assume it will require an update from Apple for this to be resolved.