This is the kind of stereo I've been looking for. It has a pocket behind the head unit for directly plugging in an iPod. From the head unit you can access the iPod's menu system and navigate through it. The main complaint is that it can't handle exceedingly long list, not that you would spend all your time navigating your iPod. You're supposed to be watching the road.
Here is the Macworld video giving you the details.