I've been looking for a solution to this as well.
Unfortunately it seems that Apple has chosen to store images on the iPhone using a proprietary format that is used on other iPods. When a picture is transferred to the iPhone for viewing it is converted into an .ithmb file. The file can is either exactly 52kb or 708kb, regardless of the size of the orginal file. This leads to the perplexing situation where relatively decent resolution jpg files get converted to a file that is both larger and a lower resolution.
You can also see these .ithmb files on your computer: They are stored in a folder called iPod Photo Cache in your iPhoto Library and can't be opened (there is a viewer for them available but it doesn't do much other than let you see the image in the file).
The option on photo enabled iPods to store photo's at their original resolution doesn't affect this. In this case it seems that the original photos are stored along with the converted .ithmb version of those photos. When viewed on the iPod the software looks at the .ithmb photos.
I've only looked into this the last few days because I would like to have hi res images stored for viewing on the iPhone. It would allow the iPhone to store and organize virtually any document you have on the Mac in iPhoto for easy syncing and viewing by using the Print to iPhoto Automator workflow that appears in the PDF menu on the print dialog.