The Liquid Submersion Indicator is very accurate in determining whether liquid has entered the iPhone or iPod. The indicator will turn red or pink when the device has been exposed to enough moisture to cause irreparable damage to the device.

You can tell if the Liquid Submersion Indicator has been triggered by looking directly down into the headphone jack. Either use a lighted magnifying glass, or angle the iPhone or iPod so light shines down the headphone jack. At the base of the headphone jack, you should see what is normally a white dot. Half of the dot becomes red (or a pinkish color) when the device has been submerged in liquid. iPhone 3G models also have an Liquid Submersion Indicator located on the bottom of the connector housing, just under the 30-Pin dock connector. To view the indicator, use a lighted magnifying glass and hold the iPhone 3G so that you can view the bottom, center of the dock connector housing.  A full red dot will appear if the indicator has been triggered.