When I create an album in iPhoto with photos that have been edited in iPhoto and sync that album to my iPhone the original photos, without any edits, appear on the iPhone. Edits were cropping and change to gray so I could easily observe the changes. If I do this with MobileMe gallery publishing, the edits always appear in the gallery on MobileMe and even get updated when the change is made after publishing. Why do they act differently? I have latest updates on iPhone and iMac as of today.
Problem was caused by corrupt iPod Photo Cache. Did a Show Package Contents on the iPhoto library and dropped entire iPod Photo Cache folder in the trash. It gets rebuilt automatically on the next sync.