yes i listen to my tunes like this too and if you want to create playlists or albums, drop the mp3 files into named folders on th memory stick and the folders can be chosen using the left/right buttons on the head unit, sadly not on the steering wheel, but you can still do all other operations from here.
I tried my old iPod in it today and to be honest im sticking to the memory stick option as i find the iPod integration ok but no good for lots and lots of music.