The modulation and differential detection characteristics of optical CPFSK transmission systems are investigated both theoretically and experimentally. The error rate expressions of differentially detected CPFSK are derived by considering phase noise of LD's. It is clear that the linewidth requirement is less than percent of the bit rate, where is modulation index. The performances of CPFSK are then experimentally presented at 400 Mbit/s using external optical feedback DFB LD's as the optical source. A beat spectral linewidth of less than 200 kHz for the transmitter and local oscillator LD's is achieved. The frequency response nonuniformity of frequency modulation efficiency is compensated by electrical circuits within 3 dB and 60°. To reduce IF thermal noise, a resonance-type preamplifier is used, with a 4.8 pA/ average input noise current density, and a receiver sensitivity 1.3 dB better than the conventional preamplifier. Differential detection of the 400-Mbit/s CPFSK modulation is performed. The generation of CPFSK is confirmed by good correlation between the output spectrum and theory. The average received optical power at a 10-9bit error rate is -49.9 dBm which improves direct detection by 10.3 dB. No additional power penalties due to 290-km transmission exist.