VOIP is Voice over internet protocal, the process of converting analog audio into packets that can be sent via the interent and any TCP/IP network. There are a number of protocols and specifications that can accomplish this, mostly, but not limited to open standards based protocols.
So how is it pronounced? just about any way you want, as it is stated on the VOIP wiki page "The acronym VoIP has been pronounced variably since the inception of the term. Apart from spelling out the acronym letter by letter, vē'ō'ī'pē, there are three possible pronunciations: vō'ī'pē and vō'ip, have been used, but generally, the single syllable vŏy'p (as in voice) may be the most common"
It says Voice but Does it include video? Apparently! and fax and sms (texting) as well! (check out Voip wiki page)
How is this used in an ip phone system? Voip technology can replace any and all parts of the tradition phone system including handsets, incoming phone connections, simplifying connection to onsite ivr, and making possible hosted ivr, as well as allowing connections via unified messaging software such as Microsoft Lync server 2010.
This concept revolutionizes traditional phone networks, eliminating complex wiring and allowing for savings, advanced features like remote telephone and office and call routings that perviously were not possible.
Quality is an interesting detail about voice over internet. Analogue phone lines often had hum and static, which is not possible with Voip, but if the packets are not timely or lost, audio distortion can occur. As with any newer technology improvements keep coming, each making it a little better. Some vendors now offer HD audio, which allows for much higher qualirty audio than was possible in the 8k analogue phone system bandwidth. As this information is often on the same network as an internet and pc network connection, the possibility of huge traffic demands, especially seen with virus outbreaks, can seriously impact call quality until fixed. Many companies and homes use this technology with great success.
You can learn a lot more about this from the Voip wiki page.