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Hi If anything the stereo was probably designed and tested using a certain version of the Iphones software, now that version 4 has been released the way the IPhone communicates may have changed.
As a result the stereo is no longer able to talk to the phone and vice versa. your probably best off contacting Kenwood direct to see if they are aware of this problem and if there is anything that can be done about it.
Turn on the car so the radio is flashing "Protect." Look on the front / removable face of the stereo. On it you will find a small round hole - that's a reset button. Find a small paper clip, unfold the clip and stick it gently into the hole. The "Protect" will stop flashing, and Kenwood will be displayed. Unfortunately all your settings/presets will be gone, but at least the stereo is working again!