I got my iPhone 3G for almost 2 months and I still haven't found out how auto-brightness works. Everything in settings seems to be set up properly - the auto-brightness is on and brightness is in the middle of the bar. Sometimes when I do something in the dark, iPhone brightness suddenly decreases which is nice because it doesn't hurt my eyes but few minutes after brightness goes back to maximum allowed level. It's really annoying. Also, I tried a small test. I was in a room with very bright light. iPhone display was very bright. Then I turned the lights off but iPhone kept shining like crazy. To decrease brightness, I had to press power button (so iPhone got locked) unlock it and then brightness was finally adjusted. How does auto-brightness work on your iPhone?