Hey Rob -
There' a lot of information in here and my iPod compatibility competency is losing currency fast - but I do have a few key ideas that may help or disappoint you, maybe both at the same time:
Bluetooth streaming of music is not possible in an E60. They did not outfit the car with the right electronics to do that, even though the Bluetooth certainly works for the phone. Yes, that is silly when you think about how ridiculously good the Ford system is and that you can get Bluetooth streaming in a Kia. Yet, here we are.
Your car may have a USB input but not have the iPod interface - all iPod interfaces look like USB inputs in BMWs, but not all USB inputs are iPod interfaces. The best way to check is to plug an iPod - not an iPhone - into it and see if the system recognizes it as an Pod. If it does not, you can add the iPod interface to your car, which is not inexpensive.
If it does recognize an iPod, you have the iPod interface. But it's not exactly an iPhone interface. I have heard some stories about what it takes to get an iPhone to play music through the BMW interface. Some say that it's necessary to put it in Airplane mode and perhaps follow a couple other steps that make it unusable as a phone, which obviously is a showstopper.
So, if that is the case, or if you don't have the iPod interface and don't wish to add it, you have some other options.
You can move your auxiliary input to the glove box, and you can do that yourself if you are comfortable taking apart your console. I believe that very near the beginning of this thread, Stream posted the schematic and instructions to remove it. I've done it several times and it's not too hard.
Or, you can move it to the ashtray area and invest in a Spec Dock
, which is a very tidy OEM-looking iPhone mount that replaces your ashtray. Check out that link. If you were to do that, I would suggest you buy the Spec Dock that carries the auxiliary interface (not the iPod interface; you can buy either). This will provide you with a line-out quality audio output from the Spec Dock into your auxiliary input.
Your iPhone will send whatever audio output it has to send through the audio line out in its dock interface. Music, Pandora, Sirius, maybe even phone calls, although I have not tried one. So you will get all of that via the auxiliary. And, while you would not have iDrive control of your iPhone, the Spec Dock mount's positioning immediately in front of the shifter is almost as good.