I have a 2007 BMW 328xi with the factory iPod adapter option. I cannot get it to recognize my 5th generation iPod, 30 GB. I have created BMW playlists as suggested in the BMW iPod Adapter FAQ article in Apple Tech support. Still after an hours drive, it still does not synch with the audio system. I have to turn off the radio, disconnect the iPod and the reset the iPod. The iPod works normally by itself or with my Mac running OS 10.4, iTunes 7.2, and iPod software 1.2.1. I took it to my BMW dealer. They checked the system and it worked fine with the service advisor's iPod. So, I suspect it is an interface issue with the 5th generation iPod where the BMW audio system cannot handle the non-audio files on the video iPod. I sure would like to find a solution. What I have in my BMW is essentially a $400 car charger since it won't interface with the stereo. I can play the IPod through the AUX port, but I have to operate it via the iPod click wheel. I didn't need to get the iPod adapter to do that.
After reading these posts, it sounds like it could be the ver 1.2.1 firmware.