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Not sure about the problem your having with the playlists, I seem to be able to cycle through all of mine fairly easily.
That is correct, you do need to hold the steering wheel arrows for an extra second or so in order for it to switch tracks, otherwise it changes your radio station based on your favorites lists. This would probably be my only complaint, though again, once your used to it, it is only a minor annoyance.
I found the easiest way to navigate is to select the mode of search (album, artist, playlist etc...) and then hit the "ABC Search" and use the small dial to quickly locate what your looking for. Once you get used to that, navigating around is rather quick.
Playlists are definately the way to go if you like to jump around between albums alot though and this is do to the slow interface speeds of the Ipod, not the PAL. However, if you just like to put it on shuffle and set it on an artist, album or playlist, you'll have no issues there.
The PE kit is an alternative, but looking at the guide, it seems virtually identical, with perhaps a few less features (unless you have a nav radio, which none of us do).