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Echo Cancellation was the next major advance in modem design. Local telephone lines use the same wires to send and receive, which results in a small amount of the outgoing signal bouncing back. This signal can confuse the modem. Is the signal it is receiving a data transmission from the remote modem, or its own transmission bouncing back? This was why earlier modems split the signal frequencies into answer and originate; each modem simply didn't listen to its own transmitting frequencies. Even with improvements to the phone system allowing higher speeds, this splitting of available phone signal bandwith still imposed a half-speed limit on modems.

Echo cancellation got around this problem. Measuring the echo delays and magnitudes allowed the modem to tell if the received signal was from itself or the remote modem, and create an equal and opposite signal to cancel its own. Modems were then able to send over the whole frequency spectrum in both directions at the same time, leading to the development of 4,800 and 9,600 bit/s modems.

Increases in speed have used increasingly complicated communications theory. 1,200 and 2,400 bit/s modems used the phase shift key (PSK) concept. This could transmit two or three bits per symbol. The next major advance encoded four bits into a combination of amplitude and phase, known as Quadrature Amplitude Modulation (QAM). Best visualized as a constellation diagram, the bits are mapped onto points on a graph with the x (real) and y (quadrature) coordinates transmitted over a single carrier.

The new V.27ter and V.32 standards were able to transmit 4 bits per symbol, at a rate of 1,200 or 2,400 baud, giving an effective bit rate of 4,800 or 9,600 bit/s. The carrier frequency was 1,650 Hz. For many years, most engineers considered this rate to be the limit of data communications over telephone networks.

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