Not something I actually plan to do, but if I was revisiting my car computer project from five years ago, I'd probably take this approach. Use a small, low-power single board computer like the Beagle Board that can run Android. Have it able to talk to an app on the iPhone via WiFi for application communications and use the Bluetooth stereo headset and hands-free capabilities to be able to wirelessly digitally play iTunes DRM music out of the iPhone through the car's speakers as well as potentially put phone call audio though the same system.
I just ordered one of these. I know, not what you're talking about, but same basic architecture minus the audio.
Does bluetooth have enough bandwidth for decent audio?
WiFi is about the easiest way to get things in and out of the iPhone, although the embedded WiFi controller is probably the most expensive part of that car diagnostic kit you linked to, wouldn't surprise me if it accounts for half of the price they're charging for it. Bluetooth definitely has the bandwidth for audio.