The iTunes sync declined to sync a track, telling me that the iPhone can’t play it. The track it declined is a 128 kbps MPEG2 track, which you would expect an MPEG3 capable device to be able to play. I have no iPod so I can’t compare notes with that. Can anyone who owns one tell me if the iPod has the same behaviour?
Update: Kalle confirmed that the iPod refuses to play this same track as well and wonders why iTunes doesn’t offer to transcode the track (similar to how it’ll convert photos for you that it syncs to the iPhone) since it can play it.

It appears to not be able to play MPEG2-encoded files, nope! I thought it could but I was wrong. Should be re-encodable fairly painlessly though (why doesn’t iTunes DO that kind of stuff? Unimpressive).
-Kalle.
Yes, it would be nice if it offered that as an option somewhere along the way! Thank you for confirming this limitation.