I'm pretty sure from what i've read before. However, i must say the zune is a total no go!
I did buy a 32gb tiny flash drive for 20 bucks and am using that though. It sorts the music by folder then you can choose what folder and play from there.
Yep you are correct. You can use the screen to fully control everything to do with the music on the ipod. I only have an ipod touch connected through usb and it works flawlessly. Just remember to turn off your bluetooth on your ipod.