Okay this is interesting. I imported some iPhone 5 videos a couple months ago into a project and was immediately met with an 'Out of Error' message when trying to play, either in the browser or the timeline. No biggy. I transcoded to ProRes422. But I just clicked on one of the original .mov files and, voila! it now plays. I'm assuming this is due to a Pro Video Format update vs 2.0.3 that occurred automatically on Sept 22, 2015. Nice to see an old legacy app like FCP 6.0.6 still getting some loving! (even if inadvertently).
However, I don't like the Accurate Gamma setting so I've been using the Gamma Correction/ Approximate. For whatever reason, the .mov H.264 files are stuck on Accurate and therefore stand out (too dark), unless I change everything to Playback/ Gamma Correction/ Accurate. For that reason, I'll stick with the ProRes files. But otherwise, this could've saved me a lot of disk space!
Could have saved disk space, but not headache. FCP doesn't like H.264, and playing back is but ONE issue. Main ones are loss of sync when editing, or when exporting. Or different parts of the video exporting than the ones you have in the timeline, thus messing up the export.
If you want to edit without transcoding, you need to use Adobe Premiere. FCP requires a transcode to ProRes.
It's an anomaly. Turns out a few of the iPhone clips play fine without transcoding. Others, I'm still getting the "Error: Out of Memory" popup. Either way, I'll be using the ProRes versions anyway. Saving a headache is far better than saving a little disk space!