Playback of embedded videos in mobile Safari has been a long-demanded feature, and while Apple's moves toward that as spotted in the latest firmware beta might be little more than a gesture - not full Flash compatibility, just avoiding having to leave Safari and view media in the standalone YouTube app - it's a start at least.  iPhone Atlas have shown this screenshot of a handset running the new firmware,with a YouTube video waiting to be started:

As with the existing app, only YouTube content is supported and only if it's been encoded in the H.264 format.  The hope now is that Apple - or third-party developers, though the terms of the SDK agreement currently don't allow direct interaction with mobile Safari - will bring out a range of plugins that will enable more internet functionality.  Considering all the publicity Apple have courted recently over the popularity of the iPhone for getting online when mobile, it would seem a strange decision not to further enhance the experience.