Hello Jonty180,
I too had the same issue! At first, I thought it was a bug in iOS 4.2.1, but a quick read in the latest iPhone 4.2 User Guide reveals that viewing movies through your iPhone Photo album is not supported through AirPlay.
Currently, the only option is to connect using an AV cable. Perhaps a future iOS update will enable viewing movies through the iPhone Photo Library.
iPhone User Guide (For iOS 4.2 Software)
* See Page 121 under "Viewing Photos, Videos, and Slideshows on a TV"
*
http://manuals.info.apple.com/enUS/iPhone_iOS4_UserGuide.pdf
Viewing Photos, Videos, and Slideshows on a TV
You can view photos, videos, and slideshows on your TV by connecting iPhone to your TV or AV receiver with an AV cable.
Or, you can stream photos and slideshows wirelessly to your TV using AirPlay and Apple TV.
Hope this helps,
Lageose