Ok, so I got a call while driving and of course I had the IPhone plugged into the stereo, so i unplugged it and answered the call. After the hastle of unplugging the Iphone from the jack and taking it off the dash window mount while drive 65 on the freeway, I called my wife back with it still plugged in and of course the music stopped and she answered. I asked if she could hear me and to my suprise she could! So all I can think is that when the headphones are plugged in it does not over-ride the built-in mic but allows it to continue to pickup sound along with the mic that is on the headphones, and if there is no mic on the headphones then you can still talk to the person without unplugging the aftermarket headphones, or in my case the audio cable that plugs into the car stereo. thus the iphone works great as a hands free device in the car!