Aha, one step further !
There is an example in the Arduino-Ide to read a switch and it tells you how to use a resistor
as pull down.
http://arduino.cc/en/Tutorial/DigitalReadSerialIn the example a push-button is used as switch. By the description given you should use the red and yellow
wire of the dialling switch and use those instead. No other external voltages are needed, 10 volt would be too much for an arduino and I guess you don't need the red wire (once more, I know little about telephones).
In the example a 10 Kilo ohm resistor is used as pull down. It ties the input-pin to ground resulting in an
0 or Low when read while the switch is open and 1 or High when the switch is closed.
10K is a good value for a pull-up/down, but any value between 3300 and 25000 will probably do the trick.
Unfortunately the sketch given won't give you the number dialled, but rather a bunch of Zeros and ones.
The sketch will continuously check and report the state of the switch.
While dialling a 0 for example, the rotary disk will slowly (in terms of arduino-speed) open and close
the switch 10 times. I don't know the exact numbers, should it take 1 second before the disk completely returned and a digit is dialled, opening and closing the switch will take about 0.1 second.
That's an eternity for the arduino and the output will there for be something like this :
0
0
0
0
0
0
0
1
1
1
1
1
1
1
0
0
0
0
0
0
....... etc
By checking for a change instead of just printing the status of the switch, it should be possible to get something like this :
0
1
0
1
0
In this example the switch is closed 2 times and you probably dialled 2.
One thing I don't know is how the switch functions, the output may... as well be reversed, resulting in :
1
0
1
0
1
if you dial 2.
Next you'll need to write a sketch that translates the number of changes into numbers. You probably
also will need to a timeout routine to see when the rotary dial has returned to it's initial state.
It will take some thinking to get it working

, but getting it done gives lots of joy.