Wow. I'm overwhelmed with the great ideas, and now I wish I had a half dozen of these so I could do them all.
To kaymkay and zenthistle -- my admittedly large-headed (in the literal sense of head circumference, not in the sense of ego) 14-year-old tried to put it on his head this morning. It sat right on top of his head and made him look like one of the seven dwarfs who fell down the rabbit hole. It would be a cute hat, but, alas, the circumference is really small for that.
Ok. so, if you still want to keep this as a bag, soak it in a solution of water and hair conditioner for a while. then rinse, but don't wring or rub, this will felt it some more. The hair conditioner will untangle the felted fibers, and the bag will thus expand some. Once it dries some, if it's too big now, felt it some more, but be very careful and check every 2-3 minutes. Hope this helps!
Ooooo, I didn't know that trick. I am going to try it. Maybe it will expand to a real bag size. (I'd love to give it to my neighbor as a purse.) If not, it absolutely will be some sort of vase or vase cover. Then, one day when I get tired of that or part gets a stain, I can cut it up and sew an ipod case or some such item.
Thanks again everyone!!