There is an Arduino phone connection tutorial here http://brohogan.blogspot.com/2009/12/telephone-interface.html
The DAA is about $15 from ebay, http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=390124087296, and the DTMF generator is very cheap Special Function IC's - Others
I am trying to build one myself so I can't guarantee anything, but this looks like your best bet.
Here is a video overview of his project: Phone Interface - YouTube