Some clarifications for those still confused about this:
First, it's not connecting your phone's "IP" (as in network) but the screen makes you think that if your device name is "First Last's iPhone" and your first and last name are ten chars long. I fixed this by going to Menu: Phone: Connected Phones: <my phone>: Edit: Device Name: and fixed the name. Unfortunately this field doesn't offer lower case characters or spaces. But if you change the name to (e.g.) "STEVE'S-IPHONE" then the car will no longer say it's connecting to your "IP".
Second, if you have the phone paired with Bluetooth and are also using the USB cable, you should (as has been hinted in this thread) wait until the car connects to the phone over Bluetooth (that annoying dialog that pops up just web you're trying to "OK" the CarWings data sharing screen) and THEN connect the USB cable. At this point, if you left something playing previously, it should resume right where it left off.
Now if I could just figure out how to pause the music from the stereo when in iPod mode. Bluetooth Audio mode has big play and pause buttons at the bottom of the screen, but the iPod screen (default screen as well as the similar "info" screen) does not. Why???
If you want to compare USB audio to Bluetooth, play something, then pull the USB cable, then hit CD/AUX twice and tap "Play". To go back to USB, just plug the cable back in and the iPod screen should appear.
With my still-stock speakers and iMatch'd 256K AAC music, Bluetooth audio sounds pretty good. Another benefit to Bluetooth is that you can plus the USB cable into a 1A charger plug in the lighter socket for faster charging (I believe the head unit's USB only supplies 500mA).