The IdeaThe Telephone Effect gets it's name from how a noise -- typically a voice -- sounds over a lo-fi telephone connection. Yes, I know cell phones, Skype, and Vonage sound pretty good, but we're talking about something lo-fi, like an older, analog telephone system. A standard telephone transmission and receiving system has very frequency response, and very limited dynamic range. In order to imitate this, you need to take a two-part approach to the audio. You'll need to use an EQ plug-in to limit the frequency range of the audio itself, and you'll need to use a compressor plug-in to crunch the dynamic range.
Let's Do ItTo start, we need to EQ. Put an EQ plug-in on the channel, or use a VST plug-in when working within a two-track editor. You need to bring down the frequencies on the low and the high end, and bring up the mid frequencies. Start by taking out everything below 400Hz, and then reducing everything above 2Khz. Then, if you have the option, make a narrow bandwidth notch of about +4-6db at 500Hz.
If you've got a good compressor, add it as well. You want to start compressing early, at around -20db, with a ratio of at least 4:1. You can change this to your liking, though. If you've got it, adding some light distortion from whatever plug-in you have and like best will give you some extra effect. And there you have it!