2 of my friends both hooked their's up through the auxilary inputs in the back of the cd player. Then they put a headphone jack coming out of the front console somewhere inconspicuous and just plug the iPod in there through one of those headphone-headphone looking cords. It works great, and sounds just fine, but it's a litte on the complicated side.
You could always just buy a new BMW and get it with the iPod connector.
http://www.apple.com/ipod/bmw/