Ok, bottom line. My iPhone was not rendering those grays. And let me tell you, the Jay-Z album cover is a GREAT test. Basically if i tilted the iPhone a certain way, it would look closer to normal, but it's at this angle you would expect it to not look right. So looking at it head on was where i was seeing the gray/black distortion.
So I decided to take my phone to my local Apple store. When the Mac Genius Brian asked what my issue was, I said I need to see one of your iPhones to compare it to mine. I brought up appleservedup.com right there on the spot. To my surprise, his demo unit was only slightly better than mine and i started to feel deflated. He started to feed me some crap about mine looking brighter, then we made sure both settings were identical.
He suggested that we watch the Iron Man trailer because he knew it had a lot of black in it. I was all for it. Sure enough his looked better and he was able to see how my blacks were washed out. So I suggested I get a replacement, but there was no way i was leaving without testing it. He whips out a brand new one and i goto appleservedup.com and compared to both his demo unit AND my iPhone. Lo and behold, this new one actually showed everything properly. Then i checked the serial number on his demo unit...started with 7R7. So this new one I ended up taking home actually looked way better than his demo unit. So this is definitely an issue. And I was skeptical about it at first and wasn't even sure if appleservedup.com was a good test, but it is. The difference between this new unit and the other two was literally night and day.
For anyone else out there who is in my area, here is the info from my trip.
Apple Store - Westfarms Mall, Connecticut
Mac Genius - Brian F.
His demo unit - Demo unit #2 (labeled on the back)
It is their job to push back on this issue and the dude was in disbelief right off the bat. He even almost had me convinced this was the way the displays were supposed to look. But a side by side comparison to a "good" display leaves no question about this issue. Anyone having this issue is entitled to a replacement in my opinion. And don't let them give you a new one without testing it first. AND, request one with an SN# that does not start with 7R7.
P.S. - My new iPhone SN# starts with 327.