This 555-based PFM modulator has good sensitivity (<= 100 mV) and excellent linearity. The 1 kHz modulating signal is applied to the base the pnp transistor which works as a controlled current source. The PFM signal at inverter's output is passed through an LPF with cutoff frequency about 1 kHz, which performs demodulation. The LED does not do any special function here and is just a replacement for a low-voltage Zener diode.
