The revised readme solved the issue.
You also had another error in the readme that needs fixing...
[FONT="]Copy and replace existing files from ¨AVFoundation¨ to /System/Library/AVFoundation/N88[/FONT]
This location does not exist.
It's [FONT="]/System/Library/Frameworks/AVFoundation.framework/N88[/FONT]
I'm running 3.1.2 (7D11)
This doesn't work on 3.X, unless you do massive modding (don't ask).
Update not working on 3gs ios 4.0.1. (but the old mod works - except youtube posting)
The phone detects the video, but when u try to view it for the first time, it only shows it as a picture. Even if u import the "video" on the computer its only a picture.