The first digital cell phones were the second generation (2G) of cellular technology. Digital phones use the same radio technology as analog phones, but they use it differently. Analog systems don't fully use the signal between the phone and the cellular network -- analog signals can't be compressed and manipulated as easily as true digital signals. This is why cable companies switched to digital -- to fit more channels within a given bandwidth.
Digital phones convert your voice into binary information (1s and 0s) and then compress it (see How Analog-Digital Recording Works for details on the conversion process). This compression allows between three and 10 digital cell phone calls to occupy the space of a single analog call.
Many digital cellular systems rely on frequency-shift keying (FSK) to send data back and forth over AMPS. FSK uses two frequencies, one for 1s and the other for 0s, alternating rapidly between the two to send digital information between the cell tower and the phone. Clever modulation and encoding schemes are required to convert the analog information to digital, compress it and convert it back again while maintaining an acceptable level of voice quality. All of this means that digital cell phones have to contain a lot of processing power.
Let's take a good look inside a digital cell phone.