It is a well known fact that the iPhone (3G)'s 2Mpix camera takes crappy shots. However, it appears to be a firmware issue, not a technical one. Here's a little comparison carried out by iPhones.ru, which clearly shows the difference between iPhone OS 3.0 and iPhone OS 2.2.1 in terms of photo quality. As you can see the camera on the iPhone isn't so bad after all.
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