Modulation used in GSM is GMSK (Guassian minimum-shift keying) - continuous-phase frequency shift keying. In GMSK, the signal to be modulated onto the carrier is first smoothed with a Guassian low-pass filter prior to being fed to a frequency modulator, which greatly reduces the interference to neighboring channels (adjacent channel interference).
GMSK basics
GMSK modulation is based on MSK, which is itself a form of continuous-phase frequency-shift keying. One of the problems with standard forms of PSK is that sidebands extend out from the carrier. To overcome this, MSK and its derivative GMSK can be used.
MSK and also GMSK modulation are what is known as a continuous phase scheme. Here there are no phase discontinuities because the frequency changes occur at the carrier zero crossing points. This arises as a result of the unique factor of MSK that the frequency difference between the logical one and logical zero states is always equal to half the data rate. This can be expressed in terms of the modulation index, and it is always equal to 0.5.
A plot of the spectrum of an MSK signal shows sidebands extending well beyond a bandwidth equal to the data rate. This can be reduced by passing the modulating signal through a low pass filter prior to applying it to the carrier. The requirements for the filter are that it should have a sharp cut-off, narrow bandwidth and its impulse response should show no overshoot. The ideal filter is known as a Gaussian filter which has a Gaussian shaped response to an impulse and no ringing. In this way the basic MSK signal is converted to GMSK modulation.
Generating GMSK modulation
There are two main ways in which GMSK modulation can be generated. The most obvious way is to filter the modulating signal using a Gaussian filter and then apply this to a frequency modulator where the modulation index is set to 0.5. This method is very simple and straightforward but it has the drawback that the modulation index must exactly equal 0.5. In practice this analogue method is not suitable because component tolerances drift and cannot be set exactly.
A second method is more widely used. Here what is known as a quadrature modulator is used. The term quadrature means that the phase of a signal is in quadrature or 90 degrees to another one. The quadrature modulator uses one signal that is said to be in-phase and another that is in quadrature to this. In view of the in-phase and quadrature elements this type of modulator is often said to be an I-Q modulator. Using this type of modulator the modulation index can be maintained at exactly 0.5 without the need for any settings or adjustments. This makes it much easier to use, and capable of providing the required level of performance without the need for adjustments. For demodulation the technique can be used in reverse.
Credit: http://www.radio-electronics.com/info/rf-technology-design/pm-phase-modulation/what-is-gmsk-gaussian-minimum-shift-keying-tutorial.php