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Real general explanation (somewhat techy.. but im sleepy so bare.... i mean BEAR with me:
Take your basic $5.00 Walmart phone, those plain old wall phones. These telephones once plugged in receive power from the phone company (this is a good tip to remember in the event of a power outage!, these basic phones should still work). Here's how: A telephone is basically a 2 wire electronic circuit, with a few main components: A (flash) hook switch, a mic, a ringer, and a speaker. The phone company supplies a very low voltage level (low enough so you can't get shocked), over the pair of copper wires.
Each of the two wires serve multiple purposes, they handle signaling of the phone (ringing), they indicate to the (CO) when the phone hook or off hook, and they carry the actual audio individually to the speaker and from the microphone.
When you lift the handset (off hook) to make a call, you're actually "completing" a circuit, or physically connecting your end to the telephone companies end. The CO see's this "connection" and returns a dialtone signal indicating it's ready for you to place your call.
Contrastly, when your phone is "on hook" this condition is called an "open" circuit. The CO see's this as a sign that your phone is "idle" ready to receive a ringing signal for an incoming call.
To signal a incoming call, the phone company sends an alternating or pulsing signal down those 2 wires to the internal ringer.
Once your actually on a call, those same 2 wires act as traffic cops, where one wire is used for the Receive signal (the audio your hearing) and the other is for the Transmit signal, (the audio your speaking). From the old days those two wires are actually known as "Tip and Ring."
Just a really (really really!) basic explanation of how a telephone works. G'nite :)
http://www.pbxinteractive.net (has a blog in there somewhere :)