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This article doesn't describe how the iPhone 4's noise cancellation technology works.
Here's a short video from Audience about how the technology works. Audience calls the technology "earSmart." The video turns to fluff about halfway through.

http://www.audience.com/about/earSmart-introduction.php

My big question now is: can it work with an in-ear headset and microphone? I like to leave the phone in my pocket or on my desk and use my headphones + mic while calling.