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Because of low-cost optical devices and virtually unlimited bandwidth, optical wireless communications (OWC) for indoor wireless local area networks (WLANs) has become an attractive alternative to radio frequency systems. Since optical signals cannot penetrate through walls or other opaque barriers, the security of infrared WLANs is very high and there is no interference between rooms. This makes cell planning easier, and the potential capacity of an optical-based network in a building is extremely high. However, an optical link is susceptible to path loss and multipath dispersion. In addition, the average transmit power is constrained by eye-safety regulations and power consumption concerns. Modulation, equalization and error-control coding techniques are considered to overcome these drawbacks, especially the effects of multipath dispersion. Pulse-position modulation (PPM) has been employed for IrDA and IEEE802.11 standards because it offers high power efficiency. We introduce a combination of pulse-amplitude modulation (PAM) and differential pulse-position modulation (DPPM), named differential amplitude pulse-position modulation (DAPPM), in order to gain a better compromise between power and bandwidth efficiency. Since these modulation schemes over an ISI channel can be represented by a trellis diagram, their channel capacity is determined using a method for calculating the capacity of a Markov process channel. Although maximum-likelihood sequence detection (MLSD) is the optimal soft decision decoder (SDD) for DPPM systems, its complexity is extremely high. We examine SDDs which are less complex than MLSD, but have performance close to that with MLSD.