search on google for how phones work. You'll see that only two wires are used, tip and ring. the other two (yellow and black) are used for additional lines, etc. so, to answer your question both. the two wires are used for sending and recieving the signals.

a little tranformer is used as a duplex coil. seperates the incomming voice and outgoing voice. you would attach the speaker and mic to the proper connections on the duplex coil. information on how duplex coils work is in the first link below. the real use of a duplex coil is so you don't hear your own voice in the earpiece (you can, but just because they found the phone sounds dead to people if they can't hear their own voice a little, so, they usually set the duplex cable to allow a little through).

here's some good phone links
http://web.ukonline.co.uk/freshwater/how700.htm
http://electronics.howstuffworks.com/telephone2.htm