I have used the beautiful camera on my iPhone 3G quite often and the picture it took on two different occasions got "scrambled". Here are they. Does anyone know why this happens?
Given the look of that band, it's probably for the best... ;-)
It happened to me for the first picture I took, never again. If it's continuing for you, I'd first try to restore the phone. If that doesn't work, take it back and get Apple to either fix it there or give you a new one.