Jeff,
I have the exact same experience! I also upgraded from the original iPhone and have found the camera on the 3GS to be a disappointment. Photo's are grainy, the dynamic range is a lot worse, and the overall sharpness is worse. Given the same lighting conditions in my apartment, photos from the iPhone 1st gen allow me to read text on a poster across the room, but with the 3GS you can hardly even tell it's text. Spot focus doesn't help, I've tried playing with the exposure to give the 3GS an advantage, but no dice.
The only situation I've found where the camera is an improvement is for macro photos. For stuff closer than a few feet the 3GS is the clear winner, but overall I'm really disappointed with the photo quality compared to the original.
I'm going to the apple store to compare it to other 3GSs to make sure I didn't get a dud, but I've already compared mine to a coworkers and it was pretty similar. I don't understand why everyone online thinks this camera is such a significant improvement, but my guess is they are just impressed with the tap to focus and macro.
-Drew