Hi. I'm new here and a hardware engineer by trade

. I think what you would need on the Droid is the following (assuming the 3.5" jack has no analog video out) :
1> USB host mode (done already I believe).
2> Some code that will take a decoded frame of data and turn it into an ITU656-like YCrCb stream. This stream is subsequently sent out over USB. This is basically a means to send digital video. You can send anything from 480i to 1080p (although bandwidth would be an issue at HD rates

). Again, the Droid would have to operate as a host to do this.
3> The tricky part. You would need some kind of USB dongle that houses a YCrCb to video decoder. These ICs are relatively cheap as are the USB 2.0 high speed endpoint ICs. All in all, the circuit would be realtively simple.
It's the software that's the issue ... especially on non-rooted phones as I do not believe you can have the USB controller enter host mode. Also, you would have to be able to DMA data from the decoded video frame to the USB interface at a rate that insures glitch free video.
If you wanted to send 480p video over USB in YCrCb stream (let's just say a 640x480 VGA-like frame), that's 640 bytes per scanline (the format decoders expects is Y(luminance), Cr (red component), Y luminance, Cb (blue compoent), etc. Each Y Cr and Cb value is a byte. The device that decodes this stream derives the red, green, and blue components of a pixel by interpolating the nearest Y Cr and Cb values.
So ... 640 pixel values x 480 scanlines = 307,200 bytes. At 60FPS, you are looking at almost 150Mbps. Ouch. 480i (standard def TV) would be half that at 60FPS as only odd or even scanlines are sent per frame. Still, you'd have to insure that the Droid can sustain those rates.
I think I might be off a bit as a Y and Cx component may constitue a single pixel though doubling the 640 pixels required to 1280 ... ouch. It's been a few months since I messed with that stuff.
So, all in all, it'd be a fairly tall order to get video out of the Droid in raw format. Your bet bet is to output compressed video and have some kind of dedicated IC to decode the video for display purposes. H264 encoded video compresses rather nicely with very good quality, so you may want to go that route.
These are just some random thoughts ... I could be wrong on some things and might be making the problem a bit more complex than need be. Two things I do know for a fact though are that you are going to need high speed, sustained data transfers from the Droid in a USB host mode AND some kind of external video decoder to drive a display IF the 3.5mm jack has no analog video support. Hope this helps ... don't let it discourage you. The only problem you'll have is that if you make this and it works, chances are some $3 knockoff will be produced in China

. The USB endpoint IC I have in mind as well as the digital video decoder IC are about $20 for the pair ... that doesn't take into account a PCB, connectors, etc. As a homebrew project, it is not cheap

!