I was having the same problem - the video played using the Flash player on desktop browsers but did not play on the iPhone.
There is some thorough documentation about HTML5 video formats at Dive Into HTML5.
I first tried exporting as .m4v files (using Quicktime) and .flv to cover all bases. But that did not play on the iPhone. I then followed the recommendations at Dive Into HTML5 to export as a .mp4 video file encoded as H.264 video.
Still not playing on the iPhone. Looking into the code, further, this plugin seems to be built to handle .m4v files but not .mp4 files.
In the file: degradable-html5-audio-and-video.php, I changed all of the instances of "m4v" to "mp4"
Then I changed my code in the post to [video src="/myblog/wp-content/uploads/2010/09/video-filename" format="mp4,flv"].
That worked on the iPhone, desktop Safari, and Firefox Mac.