The new Nikon D3100 is capable of 1080HD just like it's big brother, the amazing Nikon D7000. The D3100 video quality is VERY good, which is quite impressive for a DSLR at this level.
The big difference between the D3100 and the D7000 where video is concerned is that the D3100 doesn't have the more advanced options like manual controls and an external mic input.
This isn't a big deal if you're not planning on doing anything more than making some family movies of your kids at the park or in the tub, but it is a big deal if you planned on doing some more professional quality video or movies.
The in-ability to control exposure is a HUGE handicap for more advanced movie making. With the Nikon D3100 you're basically stuck letting the camera control the exposure, which means you can often see the exposure changing in your video as the camera makes metering adjustments.
The lack of an external mic input is a biggie for those wishing to get better quality audio for their video. With the D7000, as well as Canon DSLR's like the T2i and 60D, you can plug in an external mic like the Rode Shotgun mic or a Sony lavalier mic and get MUCH better sound. You can't do this on the Nikon D3100.
The D3100 is also limited to 10 minute video clips, whereas the Nikon D7000 can do 20 minute clips. Not a big deal, especially for the market the D3100 is aimed at, but a limitation none-the-less.
Now before you go thinking these are big knocks on the Nikon D3100, let's remember what we're talking about here. The D3100 is Nikon's ENTRY LEVEL DSLR, and it's only a little over $500! Canon doesn't even have a DSLR at this price point that does video.
For the price, the Nikon D3100 is a great camera. You can't expect everything on a $500 entry level camera. If anything, I'm amazed you get SO MUCH for your money with the D3100.
As I mentioned earlier, the D3100's video quality is very good. It has very little (if any) of the negatives that people observed with the Nikon D90 video. The color is great, and the dynamic range is impressive.
The D3100 also features the new Nikon AF-F continous autofocus in movie mode. I was pretty excited about this feature when it was first announced and had high hopes for it. A DSLR that could focus as well as my Canon HF200 Camcorder would be fantastic!
Alas, that was not to be. The AF-F auto focus, while impressive on paper, is near useless in reality. Focus is intermittent at best and totally lost at worst. You can also hear a lot of noise from the lens focusing in the audio. Perhaps the AF-F auto focus will be ok for the casual user making home movies, but for myself, I find it to be pretty much unusable.
Over-all, the Nikon D3100 video is very good for a DSLR at this level and price point. If you're just planning on filming the kids and home movies type video, you'll probably be happy with the D3100's video abilities.
If you think you'll be wanting to do more advanced video and require exposure control and more advanced audio ability, then you'll probably want to step up to the Nikon D7000 or consider the Canon T2i or 60D.
Here's a couple of quick sample videos I put together from Nikon D3100 shooting with AF-F Auto Focus and Face Priority mode. Note the intermittent focusing as well as the sound of the lens on the audio.
Nikon D3100 Review: Auto Focus AF-F Face Priority with the Nikon 18-105mm VR
Nikon D3100 Review: Auto Focus AF-F Face Priority with the Nikon 35mm f1.8G