Photos in iOS 4.2 auto compressed/crap quality

I had this nice wallpaper i made that looks normal on every computer I placed it on and it looked normal under the previous iOS on my iPad when I had it as the wallpaper.
Its a simple grey background with white text and the center letter is Red, but for some reason the red letter looks compressed/low quality compared to the file sitting on my desktop, in iphoto and mail on the ipad.
no matter how many times i try to recreate the image the red letter looks crappy while the rest of the image looks okay but noticeably different/compressed or something.
does anyone know whats the reason for this? or how to change it?
it doesnt make sense, the image looked normal on the iPad prior to the update....

I have confirmed youre issue on my iPad with WiFi+3G using those images in your links.
the red looks completely loss of quality.
However that was with the JPGs but NOT with the PNG files you provided.
BUT not to mention the **** thumbnails in Photos have little grey dots and looke pixelated and bitmap-ish...w t f?!
They look like the color in the photos are some really bad 8-bit color.
View the screenshots below, note the comparison between the two SAME screenshots, one PNG and one JPG.
JPG -> http://img829.imageshack.us/img829/1183/screen1qbm.jpg
==
PNG -> http://img139.imageshack.us/img139/4845/screenrw.png
Pixelated/Bitmapish thumbnails
http://img686.imageshack.us/img686/3272/picql.png
Ugh this is kind of annoying, the last iOS displayed everything in crystal clear quality.
Is this an indication that its meant for a higher resolution display or is it just a garbled iOS version for iPhone/iPod Touch devices?

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