OMG, I thought I was going crazy! I just got this Pioneer radio 2 weeks ago, and was great until I updated to 4.1. I've already reset AND restored my iPhone, neither of which works, btw. This issue is not limited to iPhone 4's either, as I have a 3GS. I don't have this issue in my Scion's factory radio with iPod connection (different car), but technically it's not iPhone compatible since it was made before iPhones (the system likes to remind me of that every time I plug it in, telling me that this unit doesn't support charging).
Also, @carebearwarrior, that doesn't work, I've tried it. It skips no matter what settings I have it programmed to. In fact, the first time I plugged in my phone after the update, it flipped back and forth between iPhone control and radio control, like it couldn't make up its mind. I thought it was weird, and it just went downhill from there.
I am LIVID. I only got to enjoy my radio for a week before Apple goes and screws it up! They better fix this bug fast.