I think the line BMW gives is more to protect themselves legally. They can't recommend full use of the 3rd row and risk an accident killing a baby etc.

My dealer highly recommended I not bother getting the 3rd row and I have regretted it every day since picking up the car. I have a friend with the x and uses the 3rd row all the time to pick up and transport kids. It does its job. Not meant to be used for 6 ft adult on a 5 hour road trip. Understanding this, since I don't mind the reduced storage and loss of spare tire, I've regretted not having it as I could have used it several times in the past few weeks. The following is my understanding from some research:

1) An average size adult can also sit in the 3rd row though it won't be a comfortable ride. You can adjust the 2nd row seats for additional room when you have 3rd row seats.
2) the 3rd row does not have latch, so if you really want to use a car seat, it will need to be with a seat belt. It is quite difficult to get an infant out as it is difficult to reach, but kids that can walk can help themselves out.
3) if you have a rear entertainment system, 3rd row seat occupants see virtually nothing since it does not drop down from the roof

I am 5'5" and have survived trips of up to an hour in the third row. It's doable--especially if you are the only one back there and can turn at an angle to occupy some of the adjacent seat.

This is a very good question. There was a fairly scary piece on this a UK TV show Fifth Gear...the piece on third row seats is about 39 minutes in.

Fifth Gear Season 15 Episode 1 airdate 01/05/2009- Video

They show a 7.5 ton lorry hitting a stationary car at 40 mph, it doesn't make pleasant viewing. Admittedly the car is smaller than an X5 and the seats are nearer the rear window.

Toyota has developed an air bag to help with rear impacts

Toyota develops new rear window airbag for small cars

I don't think I want me, or anyone to in the 3rd seat of any car, when a truck
creams the back end like that...I suspect BMW made its 3rd row pretty damn
"safe", as they are well aware of the US mkt and our barristers.

No car is bullet proof, so to speak.

It appears to be safe to me. Kids under 15 are generally comfortable in that seat. It's not designed for infants or toddlers though.

I have used mine a number of times when I've had "soccer mom" duty or visiting family. I think it's great feature if you just occasionally need a 3rd row. If you need a 3rd row frequently, I would recommend that you look at another vehicle.

Absolutely agree that no car is bullet proof but in the days of side impact bars, curtain airbags etc it's interesting that Toyota are the only manufacturer (to my knowledge) that are doing anything to in the way of proactive safety to specifically address this issue. The Toyota airbag is for small cars where passengers sit very close to the rear window not for an occasional row of seats.

I recently was shown photos of a X5 with third row that had been in a rear ender.

It was a friend who has been working in China for BMW that had taken shots of a X5 overthere that had been hit by a truck at lowish speed.

His point of taking this was to show that BMW have invested time into making the rear crumple zone a lot more rigid for the sake of third row seat option.

That being said I will only ever put one of my three children in the third row if they or we have friends wanting to travel with us as well. Not a spot I would put them in daily.

dont really care who has made the car the rear doesnt have that large thing called an engine attached to it which offers some impact absorption

The 3rd row seat is worth getting just for the auto levelling suspension on 3.0 (it is standard on the 4.8).

BMW is pretty good at testing their vehicles and I would be surprised if it does not provide 5 star protection. Having said that those seats are definitely not a couch, and probably are good for smallish folks, less than 6ft and short rides.

I would question why the BMW salesperson would recommend Q7. Looks like you are in the market and he dosn't have any X5s on his lot with 3rd row seating ;)

He probably recommended the Q7 because it had a higher profit margin that month, or some other reason like that. I used to work in sales (electronics) and sometimes manufacturers would give us bonuses (cash + stock) if we sold a certain amount of their product in a given month. So, if we were trying to hit a Sony sales target for the shop, and someone asked should they get Sony or Panasonic, it was in our financial interest to push Sony. I wasn't callous about it, but all other things being equal, you'd push the Sony. I'm sure similar spiffs/difference in margins etc apply in car trade.
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Regarding safety: I think what they said in the 5th gear video above sounds reasonable...

I agree with what others have said: I reckon BMW cars would be above average for seating in this size+configuration vehicle, but every time I look at kids in the back of a 7 seater with their heads 10cm from the rear glass, I cringe...

They are not multi-franchise dealers, so the Audi Q7 recommendation was actually for the OP to visit a different dealer.