iPhone user, Brandon Lain has posted an image flickr about the discovery of a bug in the iPhone OS 2.2 when saving photos. According to Brandon this was confirmed by another iPhone user, Scott Johnson, who indicates that the iPhone is indeed "upscaling a thumbnail of the downloaded image."
Apparently, under iPhone OS 2.1, images saved from an email message or website that were larger than the native resolution on the iPhone were scaled down, with a resample resulting in a clear image on the screen. iPhone OS 2.2, however, does not perform the resample, and therefore yields a fuzzy and pixelated image.
The site goes on to detail how you can recreate this bug yourself:
"Try this out yourself. On your computer, resize one copy of an image to no more than 480 pixels on the long side and a second copy to about 640 pixels on the long side. Email both to your phone, and save them to your camera roll by tap-holding on the images in mail then selecting Save 2 Images."
Next, open the Mobile Photos app and see the results for yourself. You'll note, like Brandon that the 480 pixel image will appear normally, but the 640 pixel image will be fuzzy and pixelated.