The software update can only be done from the center console USB port, I believe.
If the file is not being recognized, try verifying the format of the USB drive. I don't believe that BMW supports NTFS -- it has to be FAT (FAT32 might work also).
2012 X3 xDrive 35i - as of 12/30/11
Deep Sea Blue/Mojave/Fineline Trim, SAP, DHP, Premium, Premium Sound, Technology, Cold Weather I&II, BMW Apps
2009 335i Sedan
2007 335i Sedan