It may surprise you to learn that the core technology behind phones did not change until recently and even the phones you use now may look different from the original phones but the underlying mechanism is essentially identical: a microphone on each side of the call turns the voice signal into a changing electrical current which is sent over the phone line and then used to reproduce the voice on the other end of the phone with a small speaker.
New technology called Voice Over Internet Protocol means that the voice is digitally sampled at the phone, turned into small "packs" of data that look much like packets containing other things like webpages or downloaded MP3s and sent over the Internet. The other end of the call receives these packs and reconcribes them back into a sound signal that we can hear.
This may not sound like an important development, but it radically changes the types of features that are possible with phone systems and also makes phone calls across the Internet dramatically cheaper than traditional methods. VOIP phones can have a lot of additional features such as browsing a phone directory or even the video calls that science fiction had been forecasting for decades! VOIP phones may look like normal phones, but they are essentially a small computer which is a node by itself on the Internet.
This can allow you to make calls virtually anywhere in the world at a cost that is much less than the traditional long distance phone service providers.