My iPod Touch and iPhone used to be on 2.0 firmware and it works great with my third party video out cable which I got for 10 bucks online. The video cable ceased to work after I upgraded to 3.0 and subsequently 3.1.2 as it keeps prompting “This accessory is not made to work with iPhone” whenever I try to play a video file.
Good news if your iPod Touch or iPhone is jailbroken – a patched iapd file solves the problem. Backup-ed the original iapd file in /System/Library/PrivateFrameworks/IAP.framework/Support. Put in the patched iapd, set its permission to 755 and reboot. Viola! Cheap 3rd party cable is working again!