It seems that in iPhone OS 3.0, you can no longer make purchases from the iPhone when using an AOL screen name as your store account.
In iTunes when entering a password for a purchase, you can use either an AOL screen name or Apple ID -- the iPhone has no such differentiation. Of course your past purchases and gift card balance is tied to the store account, so it's not as easy as just creating a new account.
To fix, I talked to a few people at Apple Support. Eventually they were able to port my AOL screen name over to an Apple ID of the same name, and now things are peachy. Had to go through a lot of rigamarole, though.
Tip: Dave Comeau