To make my hold system, I opened the phone, removed the jack that connected the base to the handset, and replaced the input and output lines with two mono jacks. I also rewired the ringer switch to turn the set on and off so I wouldn't have to continue to use the handset for this purpose. To use the system I just answer my regular phone, tell the person they will be put on hold, and turn the hacked phone on. Then I turn on the hold music from my iPod, hang up the phone I used to answer the call, and go about my business until I'm ready to talk to people.
I originally meant this to be an Instructable, but I didn't document it because of camera troubles. If you are going to attempt to build this yourself, feel free to ask me any questions.