To me this sounds like you're circumventing the coolest part of a factory iPod connector. In my MINI Cooper, I plug in the iPod and it gives me a similar screen, don't remember exactly what it is. In this mode, I can control the iPod from my head unit or from the steering wheel controls. I have to setup 5 playlists in iTunes (MINI1, MINI2, etc). The MINI reads these as "disks" in a "cd changer", it automatically makes the "6th disk" all songs on the iPod. This gives me total control of the iPod from the steering wheel. Maybe the Volvo version doesn't do this, but it sounds like a similar situation.

Hint for Volvo doesn't seem to work with the '04 system -- playback and playlist selection works, but once the phone is connected to the head unit, it's locked in.
To make a call, pull over and unplug it.