Step One: Get a phone. The best ones are the old rotary types. Thrift stores have 'em, usually for $3 or less. Specifically, you want a handset that has an un-screw-able mouth-cap and ear-cap. Also, you'll need a decent length piece of mic cable (couple feet — really whatever you want), an XLR jack (or 1/4" if you prefer).
Step Two: Junk the body of the phone. Unscrew the handset parts and toss the speaker in the earpiece. In the mouthpiece is your mic. It's cheap, it's crappy, but it's just what you want.
Step Three: The mic will have two wires coming out of the back. Most that I've seen are attached with screws. Cut 'em or unscrew 'em and attach (screw or solder) your mic cable to the mic. The hot and ground wires go to one, the negative to the other. It shouldn't matter which is which.
Step Four: Thread the mic cable through the hole that once held the twirly phone cord. Screw the handset back together. On some phones you can put the mic into the ear part — generally, the ear-cap has more holes than the mouth-cap — and on some phones you can't do this. You may also want to add some foam or cloth to the inside of the handset to cut down on rattles. Attach the XLR to the other end of your cable and voila: Telephone Mic.
Test carefully a) to make sure you wired it right and b) because these have a pretty hot output. It'll be scratchy and compressed as hell, but sound exactly like you expect it to. Good luck!
