Your assessment would be correct (although your debug does not provide any real information). In vShare 2.7, the script mistakenly assumes that any file that has a .mp4 extension is already in a format that is valid for flash. Thus, any file with a .mp4 extension bypasses conversion and is merely renamed and copied to your flvideo folder. The problem with this behavior, as you have stated, is that the only flash compatible videos that are apart of the MPEG-4 standard is H.264. Other MPEG-4 variants are not compatible with flash and, consequently, will not play.

You can either open a support ticket with vShare and have them remove the code that does this, which would force any .mp4 file to be converted (as it should) or, if you know PHP, you can remove the code yourself in the functions_upload.php file.