You're getting outbid because you haven't exceeded the other person's proxy/maximum/hidden bid.
http://pages.ebay.ca/help/buy/outbid.html
It is very possible the other bidder has placed a $50 or higher bid on the item even though you saw it at $29. When you bid $35, you got the outbid notice because you still haven't exceeded their highest bid. Ebay used enough of their proxy bid to place them one bid increment above your bid.
As for the item still showing $29, ebay search pages are a little behind sometimes but the $41 you saw in the listing is the current high bid untill someone else comes along. Sometimes within a listing it is necessary to click on the refresh button to see the current high bid.
Non paying buyers deserve unpaid item strikes.