From this BBC report:
The TerraNet technology works using handsets adapted to work as peers that can route data or calls for other phones in the network.Note that Ericsson has NOT invested in the company, as the BBC reports, but is funded by private investors - see clarification from TerraNet. However backing from a handset manufacturer would make sense, as it would allow them to bypass mobile operators and increase the value in the handset, not in the network
The handsets also serve as nodes between other handsets, extending the reach of the entire system. Each handset has an effective range of about one kilometre.
This collaborative routing of calls means there is no cost to talk between handsets.
When a TerraNet phone is switched on, it begins to look for other phones within range. If it finds them, it starts to connect and extend the radio network.