Movie media player software VLC has been removed from the Apple App Store. Apple did not consider removing it until a lead contributor to the VLC project and Nokia employee Rémi Denis-Courmont complained that the app was violating a GNU public license (GPL). Apple App Store downloads have DRM applied to them, which violates the GPL. VideoLAN, the group that created the desktop version of VLC did not have anything to do with the media player getting removed.

ZodTTD: the home of the homebrews has released vlc4iphone.  vlc4iphone acts as a port for the VLC media player and has a built-in front end.  Currently, anyone that wants to use the application on their iPhone or iPod Touch is expected to donate $5 or more to download.

vlc4iphone supports file decoders: XviD, h265, MP4, FLAC, 3GP, MP3, MPEG2, AVI, etc.  ZodTTD is working on a way to support VCD, DivX, WMA, and WMV next.

In order to get VLC to work, your iPhone will have to be jailbroken.  Below is a video demo on how (make sure to read the info):
[youtube]http://www.youtube.com/watch?v=ctKXZ-O-rUU[/youtube]

Information Source:
[1] Download Squad: VLC on the iPhone and iPod Touch? Yep by Drew Olanoff