"What do you see in this picture?"

What you are observing are compression artifacts. Take a look at highly compressed MPEG, AVI, WMV, etc files and you will see the same thing. Part of some compression algorithms is that they take square blocks of the image, just like that, to break down the image into progressive "layers."

Attached is a screenshot from Blazing Saddles (Recompressed using MPEG algorithms) showing the same compression artifacts. The hand is in motion, and thus "more compressed" and thus more blocky.

For another example, here's a progression (zoomed in at 4X) of the same picture being compressed at 30, 50, 75, and 90% on a JPEG algorithm.

Hummmm, interesting. The effect of the higher compression is very similar to how photo mosaics look. I'm still wondering where the extra colors came from (like the yellow, blue, and greens).

Serpwidgets, you're right on, and great examples. This thread was bugging me to no end as I was reading it. I've been a professional graphic artist for over ten years and have seen (or done) nearly every kind of photo manipulation there is. My first thought when I saw this was it's just a bad photo that's been overly compressed. Automatic color reduction and file compression can certainly do funky things to photos and the colors therein. To compress skillfully takes a gentle hand and a critical eye, and there IS a do not cross line as far as compressing too much. This person didn't see that line. I do think the color has been manipulated to make the snake redder, but as far as superimposed images of devils and babies, no.. I really don't think so.