OK, this bug is related to MDL-5617 and discussion thread http://moodle.org/mod/forum/discuss.php?d=68474&mode=3

Here is how to reproduce:

1. Add 10+ questions from the Question bank to the "Questions in this quiz" queue, click on "Save changes".
( By default the quiz will set the Display of "Questions per page" to "Unlimited" )

2. Click on the "Update this quiz" button, now change the "Questions per page" from Unlimited to 3 (or 5, you pick a number).

3. Scroll down and click on "Save and display" button.

4. Click on the Preview tab, you will notice that the pagination is NOT working.

We came up with a proposed patch, please see attached diff file.