If the theme is working, albeit oversized, then it's most likely not an issue with 4.2.1 compatibility. Since the theme is coming out oversized then it might be an issue with resolution of the icons in that theme. For iPhone4's the sizes should be around 40x40 pixels. Since you have a 3GS, it should be about half that, or around 20x20 pixels. Check the res on the icons in that theme and see what they are. My guess is that you have an iPhone 4 statusbar theme which might explain why it's coming out oversized.