Audio quality issue iPod USB vs. Aux input

[petersandler]

I happened to be having a problem with my iPod playing in the car, which made me believe I had a problem with my Y splitter cable for the USB/Aux input from the iPod. After plugging in two other iPods without the same problem, I determined the iPod was the culprit. After switching iPods, and also playing around while trying to diagnose the problem, I came across the following issue....

If I use the headset out plug on the iPod straight to the AUX in without using BMW's Y cable, I get SIGNIFICANTLY BETTER audio quality then when I use the Y cable. The only thing I can think of is perhaps the USB interface isn't using the AUX line? Is it possible that USB connection relies on the BMW head unit for the digital/analog converters, and if so, is the iPod's built in D/A converter better then the factory head unit (I have the Premium Sound package).

Anybody experience something similar?