I have also been battling this problem for quite some time. Never could get an M3U playlist to recognize what was on the microsdhc (8gb) card. Tried renaming the main drive letter of the card to the same as the internal memory. That locked the player up. Tried putting a playlist folder on the card. That locked the player up, too. Everything else works flawlessly. These players would be nearly perfect if they had on the fly playlists and if playlists could play what was on the microsdhc. That would make these players a way, way better value than an IPOD Nano. When you said that it was impossible for a playlist to access both sources, did that come directly from Insignia Support??? They didn't happen to mention if there was a forthcoming firmware update did they???