Here is my experience with some time with the camera. I am NOT a photogropher and do not have a DSLR or anything that high end, so please keep that in mind. I am also not an iPhone 4 owner/user, so am basing this experience on just the iPod Touch for what it offers.
General
* I LOVE the video that the device can take! Having the iPod Touch on me enables me to take impromptu video when out with the family without having to remember to bring the Video camera.
* Not too impressed with the still shots. As I've seen mentioned before, it definitely looks like something where a video still was snapped.
* For whoever said the camera should not have been included - that's your perogative, but I'm happy to have one just in case.
* Digital Zoom... er... sucks! I have not been able to do anything useful with it in any situation. Everything is just blown up and pixelated.
* Low Light - probably bad...
* Outdoors or decent lighting - good...
* The iPod Touch camera will not replace a digital camera, nor will it replace any video cameras either. Take it as something to play with and have fun with and as another alternative or option.
Specifics...
VIDEO
* Video seems to be the stronger feature between motion and still. Under GOOD lighting conditions, namely outdoors in the sun. Video actually comes out very good to me, even when uploaded to the desktop. I was at the park with my family this past weekend and shot video and it came out really good and I am very satisfied with it.
CAMERA
* Pictures come out okay to decent, but only when there is lot's of light, again, namely outdoors. None of my indoor shots look good to me and appear too dark and very grainy. It's the equivelent of taking a picture with any digital camera without the flash enabled.
* Pictures taken with great lighting conditions come out half decent. They are still grainy and might be fine for printing when they are scaled down, but not something you would want to show on a full sized computer screen.
Just my thoughts...