The iPhone has more antennas than an ant colony: seven for the cellular networks, one for Wi-Fi hot spots, one of GPS, and one for Bluetooth.
Bluetooth is a short-range wireless cable elimination technology. It's designed to untether you from equipment that would ordinarily require a cord. Bluetooth crops up in computers (print from a laptop to a Bluetooth printer), in game consoles (like Sony's wireless PlayStation controller), and above all, in cellphones.
There are all kinds of things Bluetooth can do in cellphones, like transmitting cameraphone photos to computers, wirelessly syncing your address book from a computer, or letting the phone in your pocket serve as a wireless Internet antenna for your laptop. But the iPhone can do only one Bluetooth thing: hands-free calling.
To be precise, it works with those tiny wireless Bluetooth earpieces, of the sort you see clipped to people's ears in public, as well as with cars with Bluetooth phone systems. If your car has one of these "car kits" (Acura, Prius, and many other models include them), you hear the other person's voice through your stereo speakers, and there's a microphone built into your steering wheel or rear-view mirror. You keep your hands on the wheel the whole time.
So far, Bluetooth hands-free systems have been embraced primarily by the world's geeks for one simple reason: It's way too complicated to pair the earpiece (or car) with the phone.
So what's pairing? That's the system of "marrying" a phone to a Bluetooth earpiece, so that each works only with the other. If you didn't do this pairing, then some other guy passing on the sidewalk might hear your conversation through his earpiece. And you probably wouldn't like that.
The pairing process is different for every cellphone and every Bluetooth earpiece. Usually it involves a sequence like this:
On the earpiece, turn on Bluetooth. Make the earpiece discoverable. Discoverable just means that your phone can "see" it. You'll have to consult the earpiece's instructions to learn how to do so.
On the iPhone, tap Home→Settings→General→Bluetooth. Turn Bluetooth to On. The iPhone immediately begins searching for nearby Bluetooth equipment. If all goes well, you'll see the name of your earpiece show up on the screen.
Tap the earpiece's name. Type in the passcode. The passcode is a number, usually four or six digits, that must be typed into the phone within about a minute. You have to enter this only once, during the initial pairing process. The idea is to prevent some evildoer sitting nearby in the airport waiting lounge, for example, to secretly pair his earpiece with your iPhone.
The user manual for your earpiece should tell you what the passcode is.
When you're using a Bluetooth earpiece, you dial using the iPhone itself. You generally use the iPhone's own volume controls, too. You generally press a button on the earpiece itself to answer an incoming call, to swap Call Waiting calls, and to end a call.
If you're having any problems making a particular earpiece work, Google it. Type "iPhone Motorola H800 earpiece," for example. Chances are good that you'll find a writeup by somebody who's worked through the setup and made it work.
Apple's own Bluetooth earpiece ($130), sold just for the iPhone, is one of the tiniest and simplest earpieces on the market. It has several advantages over other companies' earpieces. For example, it comes with a charging cradle that looks and works just like the iPhone's, but has a hole for charging the earpiece simultaneously.
Better yet, this earpiece pairs itself with your phone automatically. You don't have to go through any of that multi-step rigamarole. All you have to do is put the iPhone and the headset into the charging cradle simultaneously—and the deed is done.
There's only one button on the earpiece. Press it to connect it to the iPhone. When the iPhone is connected, you'll see a blue or white 
icon appear at the top of the iPhone's screen (depending on the background color of the program you're using).
To use this earpiece, pop it into your ear. To make a call or adjust the volume, use the phone as usual. The only difference is that you hear the audio in your ear. The microphone is on the little stub (the iPhone's mike is turned off).
You answer a call by pressing the earpiece button; you hang up by pressing it again.
The iPhone works beautifully with Bluetooth car kits, too. The pairing procedure generally goes exactly as described above: You make the car discoverable, enter the passcode on the iPhone, and then make the connection.
Once you're paired up, you can answer an incoming call by pressing a button on your steering wheel, for example. You make calls either from the iPhone or, in some cars, by dialing the number on the car's own touch screen.
Note
When Bluetooth is turned on but the earpiece isn't, or when the earpiece isn't nearby, the icon appears in gray. Oh—and when it's connected and working right, the earpiece's battery gauge appears on the iPhone's status bar.
Of course, studies show that it's the act of driving while conversing that causes accidents—not actually holding the phone. So the hands-free system is less for safety than for convenience and compliance with state laws.