I recently purchased a DJI Phantom 1 with an H3-2D gimbal. Everything works great, except for when I rotate the quad to turn the gimbal tilts to the side. Not sure if this is a defect or a problem that is fixable or meant to be. Any comments would be greatly appreciated.

I'll post a youtube link of footage of the problem in action.

Sounds like you might have your gimbal set for FPV mode.  Go into the Vision Assistn and remove the check from the box.  Otherwise, we're still waiting on that YouTube footage zack!