I have a 4/08 X5, cable and iPhone 3GS. I get the same message. Say no. iPhone functions perfectly and charges. I get the same message w/my older Apple Universal dock (A1153). It too works and charges fine.
I tried using a USB card but it's flaky. Sometimes the car does not recognize it and I have to pull it and either reinsert it or turn the car off and on before it works again. That and managing the music manually and deleting the Apple resource files is a real pain.
I also charge the iPhone in work using my very old iPod Mini cable (the one you have squeeze the side buttons to release). It too works fine and charges.
I also got tired of forgetting the iPhone in the car, like others have posted in the past. So I finally broke down and bought a new Nano 5G. Funny thing is it works fine, no messages, in my older Apple Universal dock. Have not put in the X5, yet.