I am having the same problem. I purchased this cable on ebay:
http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&ssPageName=STRK:MEWNX:IT&item=250268585597
and it arrived today.
It said it would be compatible with "iPod Classic, Nano (video), touch, and iPhone".
But it sure as heck doesn't work with my iPhone 3G. Audio gets through but no video.
What's more, the iPhone 3G actually pops up a message telling me: "This accessory is not compatible with iPhone. Do you want to turn on airplane mode to reduce interference?" And then I can choose yes or no. Choosing either doesn't get me video.
Is apple really being so jerky that they install a chip that FORCES you to only buy their over-priced $50 cables from the apple store? Unbelievable. What are they, run by a bunch of Ferenghi?
UPDATE:
I tried it again a little later, and was surprised to see that video was working! Great, I thought. But after about 2 minutes of flawless playback on the TV, the iPhone just quit playing that video and went back to the video selection screen where I had chosen the video. That is, the iPod app did not crash because iPhone didn't go back to the homescreen. It's just the video stopped playing. And then I couldn't get the video to play on the TV again. After unplugging and replugging the cable several times, I got another video to start playing on the TV, and again after just a minute or so it stopped.
Also, several times I got a message on the iPhone 3G: "This accessory not made to work with iPhone." but it's supposedly compatible with iPhone!
I wonder if this is a problem with this particular cable, or if it's a bug in the iPhone 3G, or if Apple has somehow made it so that we can only use their particular AV cable?
Seeing as how I only paid $16 including shipping for this cable, it's not a huge deal, but I want to make sure that the iPhone 3G should be able to output TV properly before I fork over $50 for the apple-blessed cable. When the video connection WAS working, the video and audio were great. No flaws, no interference (I had the iphone in Airplane mode for some of the time, but the first time I got the video to play on the TV, it was NOT in Airplane mode).
My hunch is that there's an iPhone 3G bug. But if someone is able to output video to a TV from the iPhone 3G without problems, I'd love to be proven wrong.