A performance test on Top Smartphone Camera shows that iPhone 4 is the best. Top Smartphone Camera Testing iPhone 4 Camera Top Smartphone Comparison
Although camera is not iPhone 4's expertise, its camera function is significantly improved, from 3.2-megapixel to 5-megapixel. It supports 720p high-definition camera, and for the first time joins LED flash.
iPhone 4 camera equips a 1/3.2 inch back-illuminated CMOS light-sensitive component, which enhances the ability to shoot under low-light environment.
When upgrading from 3.2-megapixel to 5-megapixel, Apple increases the size of the photosensitive element in stead of shrinking pixel size. It keeps the pixel dimensions the same as the previous generation products, and in return, guarantees the quality of photos taken.

Photos taken by iPhone 4 is better than two entry-level digital cameras, Samsung HZ35W and Sony WX1, in exposure and color, but only a little weak in sharpness and distortion. On the whole, iPhone 4 is in the lead of all smart phone tested, including Moto Droid X and HTC EVO 4G.

In the video capture capabilities, the 720p 30fps video shoots by iPhone 4 is ahead of all other mobile phones and cameras. iPhone 4 camera is only slightly behind the special hand-held video camera Flip Video M2120.
Related Article: iPhone 4G First Hand Experience Reprot