Has it been this way since you got the phone or only with CM7? Mine takes horrible pics indoors. It looks like the lens is blurry, but it's not. Outside in good light it gets good pics.
One of the first things I do after restoring or flashing a ROM is turn off all geotagging. So I know that wasn't a factor in my pics. Quality is still nothing near what STOCK Froyo offered. I might pause at stock GB to see how it fares then, but I usually flash right to CM7 so I haven't tested performance on it. Very sad.