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Yah I uploaded you video to my 3GS and it didnt work. Only skipped around and flashed a bunch of green all over the place. I then ran the video through Quicktime and exported it as movie to iphone.(video played fine after conversion) The original video's settings looked like so:

Kind: MPEG-4 Movie
Size: 7.5 MB
Same Dimensions
Codecs: MPEG-4 Video, AAC
Bit rate: 928

With the new conversion, stats looks like:

Kind: MPEG-4 Video File
Size: 7MB
Codecs: AAC, H.264
865 bit rate

I guess your 3G movies will need a conversion? Not sure why.
 
If this video is accepted by iTunes and plays flawlessly with 2G/3G means 3GS video decoder is buggy.
 
either mpeg-4, non h.264 support was dropped on the 3Gs or it was dropped on the 3.0 update.
 
It's not 3.0. The example video is playing nicely on updated 2G/3G.
 
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