No, I purchased the new iPhone 4 cell phone and gave my wife the iPhone 3. There was no upgrade. Yes, I can save e-mail photos to the camera roll just fine.

I deleted the app from both iPhones and re-installed them and it still did the same thing. Just now I tried choosing two photos that was actually taken by the iPhone 3 and it worked. If I try to transfer two photos that were actually saved to the camera roll from an e-mail that was retrieved from the iPhone 3 it does NOT work. Let me know if that is too confusing an explanation.