iPod Docking Issue NEED HELP ASAP

[Maxim]

My 2008 128i has iPod docking and everything was working fine until recent iPod software update. Now the car simply tells me to insert iPod and nothing is working. I use to use just the regular USB cable that came with iPod (no AUX). I took my car for a recall and also told the BMW to fix the iPod issue. After two days they called me said that I MUST use the "Y" cable to be able to use my iPod. They are making me purchase the cable (which is not a big deal) but the biggest concern for me is that I lose sound quality when using "Y" cable because it plugs in both, into USB and the AUX unlike my "previously working" situation where I ONLY plugged iPod into USB without AUX and was able to control iPod from the head unit.

Did anyone faced a similar issue? Do you guys use the "Y" cable in your 1 series?
P.S. Its not an iPod because both iPods were working fine UNTIL I updated software with iTunes.