I have an iPhone 3G and have been successfully caching with it since 7/27/10. I started with the free Groundspeak app and liked it so much I bought the real thing. I have only logged 24 caches so far. Of those 8 were did not finds. Of those 8, it turns out 6 had been muggled and one was a micro that took me two tries.
I have not had much success using the compass portion of this app, because when I get close (20 ft or less from the cache) it starts spinning around. If I keep it on the main navigation screen and use the distance info on the top right I am led up to the cache.
I think the biggest thing about using the 3G is that you cannot be in a huge hurry because of the need to update. However, if I just walk at a normal pace in a straight line it will update fast enough to lead me to the right place.
I have not had success with GPS apps like MotionX or others available at the app store.
The only downside to using the Groudnspeak app is that it is a bit of a battery hog.
That being said, the $10 investment for that app has totally been worth it. It has worked well for me as a novice geocacher.