When I first got my iPhone - I ignored the headphones that came with it in the box. I thought that they were similar to the ones that came with my wife's iPod. A couple of days ago while looking for the manual, I took a closer look at head-phones and boy are they different from the normal headphones that come with iPods.
iPhone head-phones have a small rectangular block on the right side ear-pieces wire. This rectangular block is a mic as well as a remote control. You can use it to take a call or reject a call, you can even control music playblack.
Here are the shortcuts that you use with the mic/button.