Old Toad wins the solved award.
The bright white (flashlight) eyes captured by the iPhone 4's camera cannot be fixed and saved with iPhoto v9.4. I managed edit it so it looked fair but the edited picture could not be saved. The only workarund I found was to use the Fix red-eye tool then snap a screenshoot of the edited picture. Not the best but it was better than headlight eyes.
There is an easy fix. The problem was solved in this forum by ingling in 2006. All you have to do is to export the photo to your desktop as a jpeg scaled down. Ingling scaled down to 2000 pixels wide, I simple exported as Large size instead of acutal. Import the scaled down version back into iPhoto and correct the red eyes on that. Click done, and it saves the changes--- even if it did not save them before. Definitely a bug & not cool that Apple has not fixed it since 2006. Follow this link and scroll down to ingling's answer