Modifying Bikes 101 - Help (1988 Bridgestone City Limit CB-2)
Bike parts are relatively swappable -- there are standards for wheel sizes (This uses a regular old 26" (ISO 559) wheels), frame spacings, etc.

This frame has vertical dropouts, so using a hub gear is not easy -- you'd need to use a chain tensioner to use it (in some cases, you can find a perfect front and rear combination to avoid this). You'd also have to respace the rear triangle to accomodate a modern hub (which can be done with a plank of wood, carefully). 

Also, swapping out parts can quickly get expensive. It's a cute bike to begin with, so I'd leave it mostly stock and make sure things are working well (e.g. good brakes, etc.).