Alright... now this is weird. I had left the USB drive in the car since the last time I tested it with mp3 files.
Today I started the car and decided to take a look at files on the USB again... the 320kps files played! I have no idea why it didn't play before and now it does? Maybe the i-drive needed to cache the USB drive directories or something so it couldn't index while playing? So strange.
But we are totally off topic now... the lightning adapter sounds terrible.