R-W,
Yep, you are correct that the OEM iPod interface only recognizes five playlists BMW1-BMW5 which correspond to the five CD's which would be in the changer if you had one. Here is a link to a copy of the user manual
http://www.bimmerfest.com/forums/sho...63&postcount=2
http://www.bimmerfest.com/forums/sho...66&postcount=3
The pairing of the phone is pretty straight forward as shakib mentioned. Here are the steps as listed in the OEM manual. They worked fine for me with my Moto Razr, but I have heard that BMW bluetooth can be pretty finicky depending on the phone, and some just won't pair period.
1. Turn key from ignition 0 to ignition 1 or higher.
2. Your mobile phone should now be set to search for Bluetooth wireless technology enabled devices. This feature may vary from model to model, see operating instructions for your mobile phone.
A request to enter a password, PIN or code appears on the display of your mobile phone, depending on the model. This is the "BLUETOOTH PASSKEY" supplied with your literature.
3. Enter the "BLUETOOTH PASSKEY" using the numerical keys of your mobile phone, and confirm the input. Look for a confirmation message on the handset.
4. To conclude the pairing process, turn the ignition key to position 0.
5. Wait approximately 30 seconds before turning the key to ignition 1 or higher. The phone will now be connected.
It prattles on about how the next time you turn the ignition to position 1 or higher, the phone will be identified within a minute and the phone book entries will be transferred to the car. (of course that depends on the phone) Up to 4 phones can be paired in succession to the car, and the 5th phone will end up deleting the first.