It's the hardware. It's not a normal camera sensor, due to the way it takes a photo. Jailbreak and use cycorder with sound if you really want.
Till then, await v3 which will very likely have decent video options.
Aurial - some of even the best new cameras out there, if you move them about can't do smooth video recording...
We might be talking about tech from 2005, but then don't forget 3G was tech from yesteryear too, and that (decent) 3G coverage hit the US shores recently...
You're absolutely right. The US seems to be slower getting phone technology than we lucky Europeans. But then we get it some considerable time after Asia generally. I'm still suprised that they went as low as a 2MP camera though. And I was dumbstruck when they stuck with it for the 3G.
You're right about camera flicker when moving digital cameras, but I think you'll find its particularly bad on the iPhone camera if you compare it side by side with another camera/phone.