While the G1 is less polished than the iPhone in many ways, the audio playback is not one of them.
Using the same headphones, and the same 256kbps, 44.1 kHz AAC source, the G1 at maximum volume has far less distortion and noise. At lower volumes there is a noticable increase in spatial realism. It’s interesting, having been in the Apple ecosystem for nearly 10 years, I had gotten used to assuming that Apple’s products would always use the highest quality components and represented the technical state of the art, however I now realize that that may not necessarily be true.
Apple’s design and usability are definitely still market leading, however their component quality can be occasionally questionable. Hopefully the 3rd generation iPhone will set a new standard for pereformance and quality, because if not, I’m going to have some difficulty justifying the price premium.