I believe that there is a CD changer option for your car but I don't know if it plays mp3 either. 2007 was a cross-over year. The later models had an aux jack and I think the CD players played mp3.
As far as swapping out the unit, I have heard rumors that someone had their system swapped to the newer version. It sounded like it was a full system swap (ICM, AFM, CD, etc). You would also have to talk Volvo Service into installing the proper software.
Another option is there are a group of guys on another form who have hacked the system and added a aux input. http://forums.swedespeed.com/zerothread?id=105447
There is also another option for adding inputs (ipod) but I think you may need a system with the changer. http://forums.swedespeed.com/zerothread?id=92057
Still there is a simpler solution that gives better results than the transmitter but is easier and cheaper to install than swapping the system or hacking. That is an FM modulator that connects directly to the antenna input.(ie. Harman/kardon Drive + Play)
2005 V50 T5
IPD Rear Sway Bar, Koni Sport (Yellow), StopTech Slotted Rotors.
2002 S40 1.9T - R.I.P.
1998 V70 NA - Sold
Remember kids, Speed doesn't kill ... impact does!