If the limitations are android 2.1 related and not htc then does that mean samsung used better sensors and lens on the galaxy? Because the video recorder from the droid Dog video makes our look really bad. Watching that and the iphone video really upset me. I actually used my video camera a lot. I have 2 kids and love taking on the fly videos of them.
I worry that HTC will just push updates out and never address this. Will xda be able to customize our video camera codecs with 2.2 to give us less blur.
The H.264 codec is motion optimized.
There is no included codec for encoding in Android beyond H.263.
At this point, anything else must be vendor or third party provided.
The lens and sensor may not measure up to the iP4, for example, but neither are they dog meat.
The data rate on our phones is constrained, as I recall, to 5 to 6 Mbps. (per Aldo Junior Ao2's link, the update puts us 8 Mbps, pushable to 10 w/ root access)
The Samsung Galaxy S is using a more light-sensitive sensor - at 5MP - and records MPEG 4 at a high 11 Mbps rate.
Source: Samsung Galaxy S Review - SlashGear
Compares to iP4 here -
iPhone 4 vs Samsung Galaxy S HD video battle: Android wins! | Electricpig
The Droid X is using the same crappy video codec we are as well as an 8MP sensor - but it's also brute forcing things with a very high bit rate, see -
720p Video Capture Comparison, iPhone 4 v. DROID X Boy Genius Report
I among others advocate the H.264 codec because 1) it's motion optimized and 2) just gives equivalent or better quality at lower bitrates / file sizes. See advantages here:
H.264 Encoder - freeware encode video to H.264 format
There doesn't seem to be an integrated chip doing the video recording, so it must be getting done purely in software.
HTC Evo 4G Teardown - Page 2 - iFixit
Whether HTC will ever address this or not is something we can speculate on - but I'm willing to bet if they don't come through, a app developer will. I believe that the many 720p Android phone flavors coming out will make that inevitable.
Either a bitrate increase or H.264 should provide significant improvements - I'd really rather that it simply be the latter.
The quality possible with the lens and sensor for stills clearly suggests that we can expect more from that combo with better software.
PS - Note the superior audio codec for the Droid X - yeah, let's have a little of that while we're at it.

