The iphone's camera output is on par with a value consumer video camera that has a reputation for good picture quality. Infact, the sensor's characteristics closely match the (cheapy) aiptek GVS 1080p camcorder...although that sensor is a 5MP sensor, and the iPhone 3GS features a 3MP sensor. The Aiptek has similar qualities, such as favorable looking noise in low light conditions, pretty good color saturation, etc.
It also appears that the phone doesn't crank the gain up and ridiculously slow down the shutter speed in low light conditions, which is very favorable.
I'd almost goes as far as to say that this phone is a valid replacement of a standard SD video camera that was intended for home use.
Would I compare it to a $600-$1500 (or higher) camcorder, no, it doesnt come close. The color is not even close and the lens is too cheap.