I had a similar problem - I have a pre-LCI 2008 E91 (new to me) and tested a few options:
- Blackberry in USB mode? Fail.
- MP3 Player with USB plug? Fail.
- iPhone with normal USB plug? Fail.
- Plain-Jane USB stick with iTunes style music folders? SUCCESS!
So I bought an on-sale $15 "nano" sized USB stick with 16GB at Staples, sync'd it with a bunch of music in folders, plugged it into the armrest USB plug, works great. My own prsonal radio station always playing my favourites whenever nothing good is on the air.
NOTE: I have the "BMW Professional" header unit, not sure if that makes a difference.
EDIT: Not sure how stuck you are - but thought I'd add: Once you plug the USB stick in, press the "AUDIO" button to select USB as the input. After 30 seconds or so the first time you plug it in, the "- -" changes to a USB symbol. Select it... it starts playing. All kinds of options after that.
EDIT#2: Forgot to mention our iPhone doesn't work either. You will need the BMW Ycable or a Blutooth hub plugged into the AUX port. Or "update the software" - didn't know you could do that..?