Does iPhone 4 support the iPad camera kit? Turns out no, at least not under iOS 4. I plugged mine in and immediately got the error you see above. Since I've gotten compatibility errors using other accessories in the past that turned out to work just find if I ignored said errors, I plugged in a camera to see if anything magical would happen.
Whether or not Apple will chose to add that functionality in a future iOS software update, or if they've decided that, somewhere in their product differentiation matrix, iPhone is for creating photos and iPad is for consuming them via USB and SD card adapter, we'll have to wait and see.