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I had the same problem. Make sure you've updated ATV to iOS 4.1. Next, make sure they are both on the same wifi network.
 
I tried Airplay with an Airport Express I have hooked up to my stereo. When, for example, I played a Quicktime stream, a new option icon appeared on the QT screen that, when pressed, presented me with the option of outputting sound to the iPhone or the Airport Express. It could not have been easier--no configuration needed to find or talk to the AE.
 
I tried Airplay with an Airport Express I have hooked up to my stereo. When, for example, I played a Quicktime stream, a new option icon appeared on the QT screen that, when pressed, presented me with the option of outputting sound to the iPhone or the Airport Express. It could not have been easier--no configuration needed to find or talk to the AE.

WAs this on a 3gs?

So you dont need to setup the iphone with the appletv. Btw is it possible to stream form mac to iphone or the other way?
 
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