Upon investigation, we were stunned to find that the formula we use to calculate how many bars of signal strength to display is totally wrong. Our formula, in many instances, mistakenly displays 2 more bars than it should for a given signal strength. For example, we sometimes display 4 bars when we should be displaying as few as 2 bars. Users observing a drop of several bars when they grip their iPhone in a certain way are most likely in an area with very weak signal strength, but they don't know it because we are erroneously displaying 4 or 5 bars. Their big drop in bars is because their high bars were never real in the first place.
To fix this, we are adopting AT&T's recently recommended formula for calculating how many bars to display for a given signal strength. The real signal strength remains the same, but the iPhone's bars will report it far more accurately, providing users a much better indication of the reception they will get in a given area. We are also making bars 1, 2 and 3 a bit taller so they will be easier to see.
We will issue a free software update within a few weeks that incorporates the corrected formula. Since this mistake has been present since the original iPhone, this software update will also be available for the iPhone 3GS and iPhone 3G.
Oops, sorry, forgot the source: http://www.engadget.com/2010/07/02/apple-iphone-4-reception-problems-a-software-issue-fix-coming/
And the official letter from Apple: http://www.apple.com/pr/library/2010/07/02appleletter.html
Well... that suggest Anand was pretty much bang on with what's happening and Apple's signal strength reporting is way off because they've allocated way too big a range for 5 bars.
Not that that fixes the problem of course, the iPhone is still dropping a fair old chunk of signal when held 'wrongly' and it really shouldn't, or at least it shouldn't drop as much as it is, (will be interesting to see if Apple makes changes to new iPhone 4's) but at least people will see a more accurate representation of their signal now, giving a better idea of when they're really in a strong signal area. I suppose that's a plus...