Click the speaker icon in the desk app so it looks like it is muted... that is actually LINE OUT, and needs to be like that to get audio out of the car dock. You also need compatible Desk Dock apps... which the one that is on stock SHOULD be. Lastly, if you want to be able to use things other than the desk dock app, you will actually need to install ANOTHER desk dock app, and then NOT select a default when you dock in.
This way, your HOME key will not just take you back to the desk dock home, but your REAL home, and you should be able to run anything and have it work.
Alternatively, if you are not running stock but are running an i9000 ROM, the i9000 kernels (most, not all) support this now natively. However, though it does support it, if you are not using the desk dock app, it seems to run your audio through the same filters as phone audio, so all the bass gets stripped out. Annoying, but being worked on in i9000.