I've been playing around with the 3 megapixel camera on my Android-based G1. Like any phone camera, you need a little diligence, a lot of light, and a steady hand.
For the best results, tap and release the shutter button, and then hold the phone still until it takes the picture a second or so later. It's not necessary to hold down the button until the picture takes. Holding down the button will contract the muscles in your hand and make it more difficult to keep the phone steady.