Image Importer Pixelating Uploaded images

I have been using WP for many years, with a self-hosted site. After upgrading to WP 3.4.1, I am having a problem with the image uploader. I will upload an image, JPG for example saved with a high quality level but formatted for the blog at about 490 pixels wide, and the resulting image in WP is badly pixelated with terrible quality, as if it was saved with the lowest possible quality/highest compression possible. Is there some setting in WP that controls the “crunching” process that has changed on me to WP is compressing my images to death?

Any help would be appreciated. I cannot find any documentation on this anywhere.