I have made the app in the larger resolution for iPhone4, and when I test it in 3GS it works/looks fine, the app scales DOWN accordingly. But when I test app on iPhone 4 it appears for reason to scale it down and then back up again creating a pixelated look. This applies to vector assets and text within the flash project as well which is even weirder in my opinion. My SWF is 640x920px.
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According to this post support for retina-display graphics is not yet supported. The two output sizes are either low-resolution iPhone or iPad. To wit: