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I don't know if you owned a 3G.
But when I did the prox sensor's red light was slightly visible also.
 
It's infrared light. Humans can't see it at all unless it's VERY bright. Then you will see it as a faint glow. Cameras can see infrared light which is why it appears so bright in the pictures.

It appears that all Apple did to "fix" the problem was increase the brightness and sensitivity of the sensor. Apparently that's not really good enough.
 
my sensor is much worse since updating to 4.1!!!! I have to press it right up against my ear to turn the display off.

That, and I have several deep scratches (hopefully) in my oleophobic screen protector and it distorts the color so annoying!
 
I cannot see the light at all.

I still have the proximity sensor to some degree after updating to 4.1 - when I pull the phone away from my face ever so slightly, the screen lights up.
 
Just to give my experience, I have the red light on mine, but I never noticed it before the update so I can't say for sure whether or not it was a result from 4.1. I believe I would have, though, as it was extremely obvious to me last night just after the update and using the phone in the dark.

As for my proximity sensor, it seems slightly worse off than before. It failed within the first minute of a call (quicker than it ever had before), and at moments would flash on and off every 2 seconds (also quicker than it did before and for longer).

Note: I perform all of the major updates like this by putting my phone into recovery mode, restoring my phone, and setting it up as a new phone as opposed to restoring from a backup to ensure a clean installation.

(Probably just going to take my phone in to be replaced because this issue is becoming ridiculous)
 
Oh...so that's the change Steve was talking about regarding the proximity sensor (glowing red). It'd be real fooking nice it happened to fix the issue.

Steve continues to lie and thinks most of us are idiots!

I sure as hell won't be an early adopter of iPhone 5 or what the hell ever it will be called.
 
Wirelessly posted (Mozilla/5.0 (iPhone; U; CPU iPhone OS 4_1 like Mac OS X; en-us) AppleWebKit/532.9 (KHTML, like Gecko) Version/4.0.5 Mobile/8B117 Safari/6531.22.7)

I've never noticed it till I used Nightstand App. It uses the sensor to darken the screen when placed on a table facedown. Very strange. IP4 OS 4.1
 
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