Lightwave systems discussed so far are based on a simple digital modulation scheme in which an electrical binary bit stream modulates the intensity of an optical carrier inside an optical transmitter (on-off keying or OOK). The resulting optical signal, after its transmission through the fiber link, falls directly on an optical receiver that converts it to the original digital signal in the electrical domain. Such a scheme is referred to as intensity modulation with direct detection (IM/DD). Many alternative schemes, well known in the context of radio and microwave communication systems [l]-[3], transmit information by modulating both the amplitude and the phase of a carrier wave. Although the use of such modulation formats for optical systems was considered in the 1980s [4]-[9], it was only after the year 2000 that phase modulation of optical carriers attracted renewed attention, motivated mainly by its potential for improving the spectral efficiency of WDM systems [10]- [16]. Depending on the receiver design, such systems can be classified into two categories. In coherent lightwave systems [14], transmitted signal is detected using homodyne or heterodyne detection requiring a local oscillator. In the so-called self-coherent systems [16], the received signal is first processed optically to transfer phase information into intensity modulations and then sent to a direct-detection receiver.The motivation behind using phase encoding is two-fold. First, the sensitivity of optical receivers can be improved with a suitable design compared with that of direct detection. Second, phase-based modulation techniques allow a more efficient use of fiber bandwidth by increasing the spectral efficiency of WDM systems. This chapter pays attention to both aspects. Section 10.1 introduces new modulation formats and the transmitter and receiver designs used to implement them. Section 10.2 focuses on demodulation techniques employed at the receiver end. The bit-error rate (BER) is considered in Section 10.3 for various modulation formats and demodulation schemes. Section 10.4 focuses on the degradation of receiver sensitivity through mechanisms such as phase noise, intensity noise, polarization mismatch, and fiber dispersion. Nonlinear phase noise is discussed in Section 10.5 together with the techniques used for its compensation. Section 10.6 reviews the recent progress realized with emphasis on improvements in the spectral efficiency. The topic of ultimate channel capacity is the focus of Section 10.7.