Some discussions about the audio options here:
http://x3.xbimmers.com/forums/showthread.php?t=529599
I would personally favour a USB flash drive over an HDD for music as it's solid state. Once it's indexed after the first time you plug it in, it's list is available almost immediately
You can play video from an iPhone if you have 6NR BMW Apps.
If you upload music to the music collection, you get no album artwork and you get the ridiculous play an album in alphabetical bug (unless you rename all of your mp3s)