The iPhone headphones are great, with their built in mic and music control, but everytime I pulled them out of my pocket I had a big tangled knot that took a while to undo. I've seen the 3rd party headphones that have the retracting mechanism, but there wasn't a set available for the iPhone even a few months after it's release. So, using the rectractable USB cable from my old treo, I created a retractable iPhone headset. Maybe there's a third party one available now, but I haven't checked because this works great.
There's still a short length between the split and the earbuds that doesn't get pulled in, but I haven't had problems with that tangling.
For more cool projects, check out:www.DanielBauen.comwww.Engineerable.com