When you press that air-circulation button, it actually closes the outside vents. So then it's just the air INSIDE the car circulating.
When the button is OFF, you are letting air in from the outside.
So if you have that button turned off, your fans turned off; and you have the heater turned to warm -- it will warm that air thats coming in from the outside and walla, you get warm air.
If you have it set to cold, cold air will come in (but only as cold as it is outside).
Get it?
So, maybe you're just thinking the air shoudl be cold no matter what, heh.