That sounds really bad. I would change the batteries especially since removing them (and leaving them out for a while) from the camera might clear a bug in the software.

   My random thoughts:

      The lens is dirty.
      The camera is really broken.
      The SmartMedia disk or formatting is faulty.

   Once our Macintosh could not retrieve all the images from the disk. Several images were lost and several had chunks missing or out of order. After connecting the camera to a PC, we were able to retrieve all the images. Still the Mac and the camera could not reformat the SmartMedia. However, once the PC reformatted the media it worked in all our computers.

   If the images are only blurry, then I imagine it is a physical problem with the camera and not worth fixing unless Fuji would do it for free. However, you should still try the fuji forum.

      Paul